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HCL Tech: Below expectations

Jan 22, 2002

The 2QFY02 consolidated numbers for HCL Technologies and its subsidiaries are below market expectations. On a sequential basis, the topline has grown by 8% and the net profits have jumped by 25%. The growth in net profits is including an extraordinary write off in 1QFY02. Excluding this, the growth would have been 1%. On a YoY basis, the results indicate a 17% growth in revenues and a 4% growth in bottomline. The operating margins have declined from 29% in 2QFY01 to 26%. This is due to the fact that direct costs for the company have grown by 26% (YoY). On a sequential basis, the company has managed to improve operating margins by controlling its SGA (selling, general and administration) expenses. The figure has grown by 1% sequentially. However, the direct costs for the company continue to grow faster than the revenues.

The contribution from offshore projects has moved up marginally to 71% as compared to 70% in 1QFY02. This translates to a 9% sequential growth. During the quarter, HCL Tech announced 5 new ‘client dedicated’ offshore development centres.

(Rs m)1QFY022QFY02Change
Other Income463373-19.4%
Operating Profit (EBDIT)9581,06511.2%
Operating Profit Margin (%)25.7%26.5% 
Interest - -  
Profit before Tax1,3181,294-1.8%
Extra-ordinary item (240)0 
Stock based sales incentive
expense/ (income)
Profit after Tax/(Loss)9791,23125.7%
Net profit margin (%)26.3%30.7% 
Diluted number of shares (m)285.4285.4 
Diluted Earnings per share* 13.7 17.3 -26.00%
P/E (x)  14.4  

Revenues from technologies development services (TDS) declined 3% sequentially. The contribution to revenues from this stream fell from 49% in the preceding quarter to 44% in 2QFY02. The revenues from what the company terms as ‘high value added services’ showed a sequential growth of 3%, contributing 72% to the revenues. This however is lower compared to 75% contribution in 1QFY02, indicating that application development services (that is not a part of high value added services) have shown a significant growth of 21%. Compared to the numbers from other software companies the growth figure is one of the highest.

The company added 22 new clients as compared to 20 in the preceding quarter taking the total number of clients to 382. Seven of the new clients added were fortune 500 companies. The list includes Lear Corporation, Mitsubishi, Mapics and Exult Inc. All software majors have reported adding a sizable number of clients from the Fortune 500 list. This indicates that Indian companies are gaining ground. Corporates in the west are increasingly gaining confidence to outsource projects to Indian software companies. The contribution from top 5, top 10 and top 20 customers increased sharply compared to 1QFY02. This could indicate strengthening of relationship with a client contributing significantly to the company’s revenues. The contribution from top 5 clients stood at 24% as compared to 21% in 1QFY02. The client concentration numbers are in line with other software majors.

At the current market price of Rs 248, the stock is trading at a P/E multiple of 14x is 2QFY02 estimated earnings. The stock price is likely to remain range bound as uncertainty clouds the prospects of the sector and therefore, the company.

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