 "HCL: June quarter an aberration")
The stock was down 2.7 per cent at Rs 1,555 on Thursday, following the results. Part of it can be attributed to its outperformance versus most peers in the past month. However, disappointment also came from muted revenue growth. At Rs 8,424 crore (up 0.9 per cent sequentially), it was lower, albeit marginally, than the consensus Bloomberg estimates of Rs 8,453 crore. And, lower than the two-plus per cent growth it had reported in the past seven-eight quarters.
One could argue that the sales growth was higher than that of Infosys (down 0.8 per cent sequentially) and Wipro (down 4.4 per cent), which face growth challenges. It was also lower than TCS’ 2.6 per cent. Volume growth at around 2.8 per cent was also lower as compared with TCS' 5.7 per cent, Infosys' 2.9 per cent and HCL’s own record.
Additionally, HCL’s traditional stronghold of IMS (infrastructure management services) business grew only 3.7 per cent sequentially, lower than the five-plus per cent growth in the past seven-eight quarters.
Positively
The bad news, however, ends here. The Ebitda (earnings before interest, taxes, depreciation and amortisation) margin at 26.3 per cent (down 40 basis points) was ahead of the estimate of 25.8 per cent, and net profit at Rs 1,834 crore (up 12.9 per cent) was way ahead of expectations of Rs 1,612 crore. While some gains came from higher other income and lower hedging losses, better operational efficiencies helped. Software services also grew at a decent rate of 3.2 per cent sequentially.
Anant Gupta, chief executive, played down the volume growth figure by saying he didn’t look at numbers from a “quarter on quarter” basis. “HCL had a year of fantastic booking across the board.” Results will flow once the deals booked (which exceed $5 billion in value) start yielding revenues, he said, adding “FY-15 looks very bullish and there are all elements for growth”.
Anil Chanana, chief financial officer, says: “We remain confident of future growth, as we are seeing momentum across all geographies and segments. We have signed big deals in the past two quarters across all segments and these will take time to ramp up. We are not witnessing slowdown in any segment. Growth momentum is back in ALTASM (its stated alternative on application support & maintenance), engineering and research & development services.”
Agreement
Analysts second this view. “Lower growth in IMS has contributed to the revenue slowdown. HCL has bagged a lot of large deals, which will take time to ramp up. Thus, we believe growth will come back. Growth in core software services was in line with expectations, too,” says Sagar Rastogi, senior analyst, technology, Ambit Capital.
Operationally, the results were better. Even as unfavourable rupee movement impacted the Ebitda margin, the 40 basis points fall in margin was better than analysts’ expectations of an 80-85 bps decline. Flattish selling, general and administration expenses, improvement in utilisation rate and stable attrition levels helped. The margins were also better than peers such as TCS (28.8 per cent, down 210 bps sequentially), Infosys (26.9 per cent, down 140 bps sequentially) and Wipro (22.9 per cent, down 128 bps).
Although the impact was higher for peers due to pay rises, the Street was already aware of this. At the net level, profit growth was also helped by a 56.3 per cent sequential jump in other income (led by treasury gains) to Rs 211 crore, lower foreign exchange losses and a lower tax rate. But, even without the other income, profit would have been ahead of estimates.
Outlook
Among regions, Gupta said Europe continued to drive growth for the company and had more potential. While some regions and sectors in the US such as the central region or utilities had been “laggards”, others such as financial services companies have moved ahead. “Europe has significant opportunities and there is huge potential in the US, too. In the rest of the world, Australia is witnessing good traction,” he added.
HCL said it had signed about 50 transformational engagements with a little more than $5-billion Total Contract Value (TCV) during 2013-14. These engagements were well distributed across all service lines and places. In verticals, the wins were led by Gen 2.0 propositions in the momentum markets of financial services and manufacturing.
Most analysts remain positive on the company. Prior to the results, the average target price, from a poll by Bloomberg, was Rs 1,656, indicating upsides of seven per cent. At the current market price, the stock trades at 16.3 times FY15 estimated earnings.