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HCL Tech: Volumes drive a strong quarter - Views on News from Equitymaster

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HCL Tech: Volumes drive a strong quarter
Jan 20, 2011

HCL Tech has announced its 2QFY11 results. Sales increased by 7% QoQ while net income increased by 23% QoQ during the quarter. Here is our analysis of the results.

Performance summary
  • Net sales grew by 6.9% QoQ during the quarter. Growth was driven by all segments and verticals.
  • Operating margins improved marginally by 0.1% QoQ.
  • Net profits increased by 23.1% QoQ. This was on account of significantly lower exchange losses.
  • Added 46 new clients during the quarter. The total number of active clients as at end of December 2010 stood at 434.
  • Added 2,259 (net) employees during the quarter. Total employee base at the end of December 2010 was 72,267. Attrition rate rose to 17.2% as compared to 16.7% seen at the end of the last quarter (1QFY11).
  • Declared an interim dividend of Rs 2 per share.


Financial performance#
(Rs m) 1QFY11 2QFY11 Change 1HFY10 1HFY11 Change
Sales 36,116 38,625 6.9% 60,639 74,741 23.3%
Expenditure 30,240 32,320 6.9% 47,365 62,560 32.1%
Operating profit (EBITDA) 5,876 6,305 7.3% 13,274 12,181 -8.2%
Operating profit margin (%) 16.3% 16.3%   21.9% 16.3% -5.6%
Other income 4 54   (196) 58  
Forex gain/(loss) (638) (133)   (2,761) (771)  
Depreciation 1,217 1,231 1.2% 2,779 2,448 -11.9%
Profit before tax 4,025 4,995 24.1% 7,538 9,020 19.7%
Tax 802 1,024 27.7% 1,381 1,826 32.2%
Minority interest & income of equity investee 2 -   11 2  
Profit after tax/(loss) 3,225 3,971 23.1% 6,168 7,196 16.7%
Net profit margin (%) 8.9% 10.3%   10.2% 9.6%  
No. of shares (m)       673.5 684.1  
Diluted earnings per share (Rs)         20.5  
P/E ratio (x)*         25.0  
*On the basis of trailing 12 month; # Financial year ends June

What has driven performance in 2QFY11?
  • HCL Tech recorded a 6.9%% QoQ growth in sales during the quarter. This was largely driven by all round performance across all its business segments including BPO (6% of total sales). Growth was largely fuelled by the growth in volumes witnessed during the quarter. The infrastructure services business (23% of sales) grew by 9% QoQ while the core software services business (71%) clocked a 7% QoQ growth during the quarter.

    Segment-wise performance
    (Rs m) 1QFY11 2QFY11 Change
    Core Software 25,868 27,609 6.7%
    Infrastructure Services 8,087 8,802 8.8%
    BPO Services 2,161 2,214 2.5%
    Revenue break-up by service offerings      
    Enterprise application system 7,837 8,343 6.5%
    Engineering and R&D services 6,754 7,300 8.1%
    Custom Application (Industry Solutions) 11,304 11,858 4.9%
    Infrastructure Management 8,054 8,691 7.9%
    BPO 2,167 2,433 12.3%
    Revenue break-up by geography      
    US 20947 22055 5.3%
    Europe 9643 10274 6.5%
    Asia Pacific 5526 6296 13.9%
    Revenue by Industry vertical      
    Financial services 9,101 9,502 4.4%
    Manufacturing 9,824 10,467 6.6%
    Telecom 3,973 4,172 5.0%
    Retail & CPG 3,070 3,515 14.5%
    Media Publishing and Entertainment 2,492 2,627 5.4%
    Life Sciences 3,034 3,245 6.9%
    Energy-Utility & public sector 2,456 2,781 13.2%
    Others 2,167 2,240 3.4%

  • As regards industry verticals, HCL Tech recorded the best performance in 'Retail & CPG' vertical where sales grew by 15% QoQ during the quarter. This was followed by the 'energy & utilities' vertical which grew by 13% QoQ. '‘Financial services, 'telecom' and ‘manufacturing' verticals recorded growth of 4%, 5% and 7% QoQ respectively during the quarter. The other segments witnessed an increase as well.

  • Based on service offerings, HCL registered a strong growth of 12% QoQ in its BPO segment. The Engineering and R&D segment and Infrastructure Management Services (IMS) business witnessed a growth of 8% QoQ each. The Enterprise Application System (EAS) business witnessed a growth of 7% QoQ during the quarter.

  • HCL Tech recorded traction across all the geographies. Revenues from Asia Pacific and Europe grew by 14% QoQ ad 7% QoQ respectively. Revenues from US also saw an increase of 5% QoQ. The company has won several deals during the quarter and has a robust order pipeline which will aid growth going forward.

  • HCL Tech added 46 new clients during the quarter where some of the new wins are multi-year, multi-million dollar deals. The total number of active clients at the end of December 2010 stood at 434.

  • Operating margins remained flat during the quarter. This was on account of higher operating expenses during the quarter.

  • HCL Tech's net profits improved by 23.1% QoQ during the quarter. This was on account of lower forex losses during the quarter. It was also aided by a whopping increase of 12 times in the other income. This offset the impact of higher tax rates. Tax rates have gone up from 20% in the previous quarter to 21% in the current quarter.

What to expect?
At the current price of 513, the stock is trading at a multiple of 16.5 times our estimated FY13earnings. (ResearchPro subscribers, kindly click here).

We would be updating our analysis post the conference call with the management, scheduled for later today.

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