HCL net up 33% in third quarter

Beating street expectations, the country’s fourth largest software services firm HCL Technologies, today posted a 33 per cent rise in its net profit at Rs 468 crore for the third quarter ended March 31.

The sterling numbers are likely to allay investors' concern on the overall demand environment for outsourcing services, especially after the lacklustre quarterly performance of information technology bellwether Infosys.

HCL had posted a net profit of Rs 350.3 crore during the corresponding period last financial year. Revenues for the reported quarter were 31.5 per cent up at Rs 4,138.2 crore from Rs 3,132.1 crore in the third quarter in 2010. The robust result pushed HCL's stocks soaring by 9.93 per cent to close at Rs 522.85 on the Bombay Stock Exchange.

“The 5.8 per cent dollar revenue growth and the improvement in margins were higher than our expectations,” said Dipen Shah, senior vice-president (private client group research), Kotak Securities. He expects the stocks to perform better. “The stock is available at a discount to the larger peers, and consistent performance in the future may provide decent upside to the stock price.”

Infosys Technologies, last week, had reported lower-than-expected January-March results.

“All service lines, verticals, geographies are growing, which is an indication that it is a broadband growth," said HCL Technologies Vice-Chairman and CEO Vineet Nayar, adding the focus on forward investment in key markets and transformation services was paying rich dividends. During the third quarter, HCL's business outside Europe and the Americas grew as much as 81 per cent. The company is also keeping a close eye on Japan, from where it gets about three per cent of its revenues after the natural disaster that struck the nation last month.

All its service offerings also showed strong growth of 34-41 per cent on a year-on-year basis. The custom applications services registered the highest growth of 42.8 per cent followed by infrastructure services, which grew by 41 per cent.

The company reported a volume growth of 4.9 per cent q-o-q. The gross margin was 32 per cent for the January-March quarter. Attrition for software services hovered around 17 per cent.

“I think, on a constant currency basis, you can expect at least a 100 basis point improvement in margins between the third quarter and the fourth quarter,” Nayar said. However, he cautioned that in July-September, when there would be a salary increase, the margins are likely to drop.

“With higher discretionary spending expected in 2011-12, the growth momentum will continue. We believe there is room for improvement in the EBITDA (earnings before interest, taxes, depreciation, and amortisation) margin, led by higher utilisation and more freshers hiring,” research firm PINC said.

The company's BPO section remained laggard. However, it expects to break-even in the January-March quarter next year. HCL has signed three new deals in the BPO space.

Overall, HCL has signed 11 deals this quarter across service lines, verticals and geographies and eight of these deals are from existing customers, it added.

During the quarter, the gross addition was 7,534 employees, predominantly laterals. The net employee addition was 1,153.The total headcount of the company is 73,420. The utilisation rate improved 180 bps q-o-q to 71.9 per cent, but is still lower compared to other large IT peers. Attrition for software services hovered around 17 per cent. The company announced a dividend of Rs 2 per share for the quarter.

For the BOXHCL has acquired certain software assets of Citibank International Plc for $26 million in the just-ended quarter. The acquisition is being funded by internal accruals. As part of the deal, HCL will also take over 41 employees from Citibank, which will offer $135 million assured revenue spread over 10 years starting from the current quarter.