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HCL Tech: Another good quarter
Jan 16, 2014 | Updated on Jan 17, 2014

HCL Technologies (HCL Tech) announced its second quarter (2QFY14) of financial year 2013-2014 (the company has a June year ending). The company reported a 2.8% QoQ growth in sales and a 5.6% QoQ increase in net profits. Here is our analysis of the results.

Performance summary
  • Consolidated net sales grew by 2.8% QoQ in 2QFY14 (The company has a June year ending).
  • The growth in revenues was slightly higher in constant currency terms at 3.0% QoQ.
  • Operating profits grew marginally by 1.5% QoQ while the operating margin fell to 26% as compared to 26.3% in the last quarter (1QFY14).
  • The net profit grew by a faster pace of 5.6% QoQ compared to the growth in sales, despite a forex loss of Rs 1,580 m.
  • Net employee count increased sequentially by 1,136 during the quarter. Total employee base at the end of December 2013 was 88,332. Attrition in the IT services business increased from 16.1% in 1QFY14 to 16.6% in 2QFY14. However, attrition in the BPO services business decreased from 6.5% in 1QFY14 to 5.8% in 2QFY14.
  • The utillisation rate for the company in the quarter stood at 84.1% compared to 84.9% in the previous quarter.

Consolidated Financial performance
(Rs m) 1QFY14 2QFY14 Change 1HFY13 1HFY14 Change
Sales 79,610 81,840 2.8% 123,648 161,450 30.6%
Expenditure 58,680 60,590 3.3% 95,972 119,270 24.3%
Operating profit (EBITDA) 20,930 21,250 1.5% 27,676 42,180 52.4%
Operating profit margin (%) 26.3% 26.0%   22.4% 26.1%  
Other income 1,160 1,110 -4.3%  635 2,270 257.5%
Forex gain/(loss) (2,360) (1,580) -33.1% (734) (3,940)  
Depreciation 1,980 1,850 -6.6% 3,414 3,830 12.2%
Profit before tax 17,750 18,930 6.6% 24,163 36,680 51.8%
Tax 3,590 3,980 10.9% 5,669 7,570 33.5%
Minority interest - -   1 -  
Profit after tax/(loss) 14,160 14,950 5.6% 18,493 29,110  
Net profit margin (%) 17.8% 18.3%   15.0% 18.0%  
No. of shares (m)         698  
Diluted earnings per share(TTM) (Rs)         73.9  
P/E ratio (x)*         18.4  
*On the basis of trailing 12 month; # Financial year ends June

What has driven the performance in 2QFY14?
  • HCL Tech's sales growth of 2.8% QoQ was driven by a decent growth of 4.7% QoQ in the infrastructure services business segment. Also the BPO segment witnessed a growth of 10% QoQ.

  • The revenue growth between geographies was mixed with the US growing by 2.3% QoQ, Europe growing 6.5% QoQ while the rest of the world (RoW) saw a de-growth by 3.7% QoQ.

  • In terms of industry verticals, Energy-Utilities and public sector witnessed the maximum growth of 21.3% QoQ. This was followed by Retail & CPG and Manufacturing which grew by 6.5% and 3.7% QoQ respectively.

    Segment-wise performance
    (Rs m) 1QFY14 2QFY14 Change
    Revenue break-up by service offerings
    Enterprise application system 13,772.5 13,995 1.6%
    Engineering and R&D services 13,454.1 13,585 1.0%
    Custom Application (Industry Solutions) 22,609.2 22,915 1.4%
    Infrastructure Management 26,350.9 27,580 4.7%
    BPO 3,423.2 3,765 10.0%
    Revenue break-up by geography
    US 45,536.9 46,567 2.3%
    Europe 24,042.2 25,616 6.5%
    RoW 10,030.9 9,657 -3.7%
    Revenue by Industry vertical
    Financial services 20,698.6 21,197 2.4%
    Manufacturing 26,510.1 27,498 3.7%
    Telecom & Media 7,244.5 7,284 0.5%
    Retail & CPG 6,607.6 7,038 6.5%
    Healthcare 9,234.8 8,757 -5.2%
    Energy-Utility & public sector 6,209.6 7,529 21.3%
    Others 3,104.8 2,537 -18.3%

  • In terms of operating performance HCL Tech had a muted quarter. Operating profits growing by just 1.5% QoQ in absolute terms. Direct costs related to employee expenses and software development rose by 3.7% QoQ. The impacted the operating margin by 0.35 on a QoQ basis.

  • At the net level, the bottomline increased by 5.6% on a QoQ basis. The forex loss in the corresponding quarter was significantly higher than the same in this quarter. This has ensured that in terms of a sequential comparison, the net profit growth was higher that the growth in operating profit in this quarter. The net margins also improved from 17.8% in 1QFY14 to 18.3% in 2QFY14.
What to expect?
At the current price of 1,390 the stock of HCL Tech is trading at 18.8 times its trailing twelve month (TTM) EPS. HCL Tech had another good quarter in 3QFY14. The company saw all round growth across verticals as well as service lines.

The management remained confident of the economic recovery in the US as well as the revival in the manufacturing sector. They pointed out that the manufacturing sector in Europe was also seeing a revival.

The management stated that the latest trends in software technologies like Social, Mobile, Analytics and Cloud computing (SMAC) was proving to b challenging for the company. The company lost a key client in the IMS segment in the quarter due to these new trends.

The company has launched a 'Digital System Integration (DSI)' proposition to keep up with the latest innovations in the sector. This would be a key part of the company's Gen 2.0 application services strategy.

The management said that they were not too concerned about the employee utillisation rate as it was in a comfortable range. They also confirmed that wage hikes would be spaced out over the coming two quarters, to avoid a negative impact of the same on margins.

Considering the risk profile of the company especially the risks that it faces to its key growth engine, Infrastructure Management Services (IMS), as well as the completely over-stretched valuations, we maintain our Sell view on the stock.

We would like to gently remind our subscribers that their allocation to equities should be decided upon after keeping aside some safe cash. Also within their overall exposure to equities they should kindly ensure that our suggested asset allocation is broadly followed and that no single mid cap stock comprises more than 4-5% of their portfolio.

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