HCL Tech net up 52%; says more in store

HCL Technologies, India’s fourth-largest software services exporter, reported a 52% rise in net profit during the three months to 30 June compared to the year-ago period, aided by strong growth in IT infrastructure outsourcing and foreign exchange gains.

Revenues touched Rs4,300 crore, a growth of 27.5% over the same period last year, while profits grew to Rs510.5 crore.
Chief executive Vineet Nayar said that while macro-economic  environment is grim and overall IT spending is coming down, a large number of outsourcing deals originally signed 5-7 years ago are now coming up for renewal, giving companies like HCL a chance to compete and win. HCL said that it signed 20 large transformational IT outsourcing deals during the June quarter.

“We are looking at one of the healthiest deal pipelines we have seen in sometime, and next two quarters will see a lot of deal signings by the Indian IT industry,” said Nayar. “Earlier almost 95% of renewals typically went to incumbent vendors but increasingly with a lot of large customers being unhappy with their current vendors, as much as 35% of renewed deals are going to new vendors.”

Remote management of IT infrastructure, which brings in about quarter of HCL’s revenues, grew 10.5% from the previous quarter. HCL also enjoyed forex gains of ¤8.3 crore in the last quarter as against forex losses of ¤135 crore year on year.

On a sequential basis, revenues grew 5.3% while profits reported in rupee terms grew 4% or in dollar terms 5.3%. Revenue growth was higher than Infosys and Wipro but lower than that of Tata Consultancy Services, country’s largest software services exporter.

Even as street acknowledges HCL’s better-than-industry revenue growth over the last few years, market analysts maintain that profit margins, which currently stand at about 14%, need to be much better if the HCL is to close valuation gap with its larger Indian peers.

“HCL Tech is undergoing a positive long-term transformation, which is why we remain positive on the stock,” wrote Abhiram Eleswarapu and Avinash Singh of BNP Paribas Securities Asia in their Wednesday client note. “Growth has therefore come at a price, and we believe investor concern that this is not a structural issue still needs addressing.

With wage hikes coming up in September quarter, margins will remain under pressure in the near-term,” said Nimish Joshi of CLSA Asia-Pacific Markets.