HCL Tech Q3 profit beat estimates; company maintains full year guidance

Performance best among top IT firms

HCL Technologies’ third quarter results not only beat Street expectations but were also the best so far among the top information technology (IT) players.  HCL Technologies Q3 FY17 dollar revenue growth was much ahead of what the markets had estimated, and it maintained its full-year guidance. 

The Q3 net profit at Rs 2,070 crore grew 7.8 per cent year-on-year and 2.8 per cent on a sequential basis. Revenue increased 14.2 per cent year-on-year (y-o-y) at Rs 11,814 crore and was up 2.6 per cent. In dollar terms, revenue grew 1.3 per cent at $1,745 million. 

HCL Tech's numbers were better than peers TCS and Infosys. TCS’ dollar revenue grew 2 per cent and Infosys dollar revenue declined by 0.3 per cent. FY17 revenues would grow between 12 per cent and 14 per cent in constant currency, HCL Tech said. This translates to 10 per cent to 12 per cent in dollar terms. The acquisitions and IP-led partnerships announced after September 30, 2016, might additionally contribute 0.6 per cent to 1.0 per cent in revenues, said the company. 

On guidance front, HCL performed better than its Indian peers. While TCS does not give guidance, Infosys reduced its annual guidance marginally to 8.4-8.8 per cent from its earlier 8.9 per cent.  

“The appointment of C Vijayakumar in the last quarter is proving to be a good move for HCL Tech,” said Anshoo Nandwaan, vice-president & principal analyst, Greyhound Research. “… he is bringing in fresh perspectives in the way their deals are being constructed. There are clear efforts to modernise existing traditional infrastructure contracts (the ones with lower margins) and increase the use of digital technologies. Furthermore, HCL Tech has a significant focus on utilities, healthcare, manufacturing and life sciences, among other verticals, which are witnessing a higher need for digital transformation and hence higher margins.”

The big positive was that the company managed to maintain margins in the range of 19.5 per cent to 20.5 per cent. EBIT margin improved to 20.68 per cent from 20.4 per cent. The company reported an improvement in EBITDA margins despite wage hikes. 

C Vijayakumar, president & chief executive officer, HCL Technologies, said: “We continue our robust financial performance. The richness in our offerings … is helping us gain a higher share of our clients’ wallet, reflected in the increasing revenue contribution from our top-5, top-10 and top-20 customers. Our revenues from fixed price/managed services contracts increased from 61.3 per cent to 63.2 per cent this quarter, further strengthening our success in an outcome-based business model.”

The Americas and Europe businesses grew 15 per cent and 10.5 per cent, respectively. Among the service lines, growth was driven by infrastructure services at 24.6 per cent, engineering and R&D services at 6.7 per cent, and application services at 5 per cent. Growth during the quarter was broad based and across verticals.

In terms of demand, Vijayakumar said there has been no reduction in spending or outsourcing contracts. "Intuitively, you will feel that they are cautious. But if you really see, no one has done anything different. They continue to do the same programmes, similar RFPs (request for proposals). Of course, there is a little more conversation on how much visa dependent are you, will you have an impact?” The company has stepped efforts to hire more locals. 

There are concerns that the new government in the US might push for a stricter visa regime. Such a move would affect IT companies, which get about 60 per cent of their revenues from the US.

"We are stepping up our campus and entry-level hiring in the US to support some of the growth that we will see in coming quarters," said Vijayakumar. He added that the company has been applying for "less than 1,000 visas a year" on an average over the past three to four years. He, however, did not provide a guidance on the possible impact in case any adverse regulations are introduced.

About 50 new clients were added y-o-y. Among the corporate development, the company's board reappointed Shiv Nadar as managing director for five years starting February 1, 2017.