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HCL delivers best net profit among major IT companies for Q3

Friday, 18 April 2014 - 8:20am IST | Place: Mumbai | Agency: dna
Net gains 59% in Q3 as Europe outperforms

HCL Technologies, the fourth-largest Indian IT services firm, beat peers, TCS, Infosys and Wipro, to report its third-quarter earnings that were way ahead of Street estimates.

Riding strong operational performance and higher other income, HCL Tech's net profit for January-March jumped to Rs 1,624 crore, up 59% year on year (yoy) and up 8.5% quarter on quarter (qoq). Quarterly revenues stood at Rs 8,349 crore, 30% growth yoy and up 2% sequentially.

The company follows July-June fiscal.

C Vijaykumar, corporate vice-president and global head delivery, ISD business, HCL Tech, said, "Ebitda margins were high on the back of large deals that moved from from transition to completion stage, new initiatives around lean and automation, which have started yielding results, and technology transformation in terms of cloud, ITeS and IP-based products helping with faster onboarding of customers, as well as lowering cost through use of technology."

HCL Tech has outperformed its peers on most levers in the quarter.

While HCL Tech reported a net profit growth of 59% in the quarter, Infy, TCS and Wipro reported PAT growth of 25%, 48.2% and 29%; their dollar revenues in the quarter came at 1.7%, 1.9% and 2.5%, respectively, as compared with 3% for HCL Tech.

Ankita Somani, analyst with Angel Broking said, "HCL Tech came out with better-than-expected set of results largely on all fronts, signalling the likelihood of a stronger year ahead. The dollar revenues came in at $1.36 billion, up 3% qoq (estimate – 2.6%), led by strong 5% qoq dollar revenue growth in infrastructure management services (IMS)."

Excluding IMS, revenue growth of the company was becoming a concern in the past in this quarter the company shrugged that off by registering 2% qoq USD revenue growth in that, she said.
Volume growth in the quarter stood at 2.9% in constant currency terms.

Dipen Shah of Kotak Securities said, "HCL Tech's results were higher than expectations on the margins front. Revenue growth of 2.9% in constant currency terms was in line with expectations. It is also higher than that reported by Infosys and TCS. HCL has reported high revenue growth and consistent improvement in margins over the past few quarters."

The company needs to improve growth rates in non-IMS businesses and implement more levers to sustain margins as utilisation levels are at high levels and cost efficiencies may not yield significant gains, going ahead, he said.

Earnings before interest and taxation (EBIT) margin of HCL Tech grew approximately 90 basis points qoq to 24.6% as against analysts' expectation of approximately 35 basis points qoq decline.
HCL Tech's EBIT margin grew more than 400 bps yoy, which is creditable task.

Somani said, "Historically, operating margin has been a concern for HCL Tech, but the company has shrug off all the concerns by consistently posting increase in operating margins since last seven quarters (excluding 2QFY2014)."

In the quarter, HCL Tech also won 12 transformational deals, contributing to a total contract value of $1 billion, and two large deals each in the $50 million and $30 million segment.

Rahul Shah, vice-president, equity advisory group, Motilal Oswal Securities, said, "$10 million clients jumped to 109 from 98 but $5 million clients declined to 183 from 187 yoy. The company said its top 5 clients growth was at 4.4% on a sequential basis. HCL Tech has announced a dividend of Rs 4 per share for the quarter. We believe it's a good investment proposition from the current price."

In terms of geographical break-up, growth was led by Europe at 4.8% in the quarter, followed by 11.1% qoq (of which India contributed a major chunk with two large deals). US continued to lag, in line with peers at 0.4% in the quarter.

In terms of business units, infrastructure managed services (IMS) vertical topped growth once more at 5.1% qoq and 31.5% yoy contributing to 34% of overall revenues, on the back of demand in Europe and APAC in financial services and healthcare vertical, followed by IT services at 2.1% qoq and 6% yoy.

BPO business was soft in the quarter at 0.8%, but the management expects this to recover and grow faster than other verticals on the back of change in business model. Other verticals also did well in Q3, led by public services at 13.9%, financial services at 6.8%, retail at 2.8% and manufacturing at 2%.

While attrition in the quarter rose to 16.9%, as compared with 16.6% in the last quarter, HCL Tech reported highest industry level utilisation at 84.2%, with the company adding 1,860 people in the quarter, taking the total employee strength to 90,190.

Wage hikes to be announced next quarter will be competitive, keeping the dynamic talent market in mind, said Prithvi Shergill, head, HRD, HCL Tech.




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