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Earnings upgrade cycle for HCL Technologies to continue

Broad-based growth across service lines to boost revenue growth

Malini Bhupta Mumbai
Last Updated : Apr 18 2014 | 12:01 AM IST
HCL Technologies has reported another set of strong numbers for the March quarter. Although the company's sequential growth in dollar revenues at three per cent was a tad below the Street's estimates, the margin expansion came as a big positive surprise. Also, the growth in the quarter was broad-based, unlike a year ago when application and maintenance was showing anaemic growth. In constant currency, HCL Tech's revenues have grown 2.9 per cent to $1.36 billion. However, margin expansion and addition in employee headcount are big positives.

The company's earnings before interest and taxes (Ebit) margins have expanded 90 basis points (bps) sequentially and 500 bps year-on-year to 24.6 per cent. Net margin has expanded 110 bps sequentially to 19.4 per cent.

Pankaj Kapoor of Standard Chartered Securities says: "The earnings upgrade cycle for the company will continue, as it has positively surprised on margins even in this quarter. The company has reported broad-based growth across verticals and geographies." For 10 straight quarters, HCL Tech has expanded net margins, what has driven the stock over the past year. The stock returned 76 per cent in FY14, well ahead of its peers.

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During the March quarter, HCL Tech reported growth across business segments. For a while, a large part of the company's growth was driven by the infrastructure segment and the application maintenance segment was growing slow. However, over the past two quarters, the application services segment has also started contributing to growth. In the quarter under review, the infrastructure services segment grew 5.1 per cent and application services segment by 2.9 per cent.

The company has an offering called ALT ASM, which looks at application and maintenance in the same way as infrastructure management services. The ALT ASM model has shifted the application and maintenance service away from the time and material model. The offering is a year old and is already delivering returns for the company.

HCL Tech claims it is seeing demand across verticals and geographies. Interestingly, while Infosys has talked about weak growth in several verticals, it has reported healthy growth across verticals. During the March quarter, manufacturing grew two per cent, financial services 6.8 per cent and public services 13 per cent, quarter-on-quarter. The telecom & media vertical has shown a contraction, while life sciences remained flat sequentially. The company is also investing heavily in new-generation propositions to garner more business from existing clients and also looking at the rebid market.

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First Published: Apr 17 2014 | 9:36 PM IST

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