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HCL Tech: Growth on track - Views on News from Equitymaster
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HCL Tech: Growth on track
Jan 27, 2009

Performance summary
  • Topline grows by 5% QoQ during 2QFY09 (financial year starts in July). Growth largely led by volume growth and acquisitions.
  • Operating margins remain at last quarter’s levels.
  • Net profits grow by 4.8% QoQ during the quarter, 12% YoY during the first half.
  • Completes acquisition of Axon Group Plc for £ 440 m.
  • Adds 26 new clients and 243 employees during the quarter. Attrition rate for IT services declines to 13.4%, from 14.2% in 1QFY09.
  • Announces dividend of Rs 3 (dividend yield of 2.6%).


Financial performance: A snapshot…
(Rs m) 1QFY09 2QFY09 Change 1HFY08 1HFY09 Change
Sales 23,693 24,908 5.1% 35258 48,601 37.8%
Expenditure 18,382 19,307 5.0% 27734 37,689 35.9%
Operating profit (EBITDA) 5,311 5,601 5.5% 7,524 10,912 45.0%
Operating profit margin (%) 22.4% 22.5%   21.3% 22.5%  
Other income 558 1,206 116.1% 843 1,764 109.3%
Forex gain / (loss) (974) (1,419)   203 (2,393)  
Depreciation 908 971 6.9% 1,410 1,879 33.3%
Profit before tax 3,987 4,417 10.8% 7,160 8,404 17.4%
Tax 439 684 55.8% 701 1,123 60.2%
Minority interest & income of equity investee (14) -   (49) (14)  
Profit after tax/(loss) 3,562 3,733 4.8% 6,508 7,295 12.1%
Net profit margin (%) 15.0% 15.0%   18.5% 15.0%  
No. of shares (m)       682.4 670.4  
Diluted earnings per share (Rs)         18.0  
P/E ratio (x)*         5.9  
*On the basis of trailing 12 month
#2QFY09 numbers include Revenue from AXON Rs 867 m,
Amortisation Rs 67 m, Interest cost Rs 17 m and Forex loss Rs 443 m for the period 16th Dec, 2008 to 31st Dec, 2008

What has driven performance in 2QFY09?
  • HCL Tech recorded a 5% QoQ growth in sales during 2QFY09. This was largely driven by the Infrastructure service business, which grew by 11% QoQ. This was followed by growth in the Core software business which accounts for 71% of total revenue and grew by 2% QoQ. The growth of this segment was slower on account of adverse currency movement during the quarter. The BPO segment recorded growth of 15% QoQ.

    Segmental performance
    (Rs m) 1QFY09 2QFY09 Change
    Core Software      
    Revenue 17,301 17,697 2.3%
    % of revenues 73.0% 71.0%  
    EBITDA margins 23.7% 24.7%  
    EBIT margins 20.2% 21.1%  
    Infrastructure Services      
    Revenue 3,709 4,115 10.9%
    % of revenues 15.7% 16.5%  
    EBITDA margins 18.9% 19.5%  
    EBIT margins 14.5% 15.0%  
    BPO Services      
    Revenue 2,683 3,097 15.4%
    % of revenues 11.3% 12.4%  
    EBITDA margins 18.9% 13.9%  
    EBIT margins 13.5% 8.9%  

  • Based on industry verticals, HCL Tech recorded the best performance in the ‘financial service’ segment. Despite the ongoing crisis in the banking and financial services industry in the US and the Europe, the financial service segment grew by 5% QoQ. This was followed by ‘hi-tech’ vertical, which provides technology solutions for semiconductor and chip design. This vertical recorded sales growth of 4% QoQ during 2QFY09 (the segment accounts for 31% of revenue). The BPO segment registered growth of 15%QoQ mainly on account of its acquired companies – Liberata Financial Service and Control Point Solutions – during the last quarter. However the management has indicated of having lost some sales from a major client in the vertical.

    Revenue break-up by service offerings
    (Rs m) 1QFY09 2QFY09 Change
    Enterprise application system 10.9% 2,583 12.5% 3,114 20.6%
    Engineering and R&D services 26.3% 6,231 25.7% 6,401 2.7%
    Custom Application (Industry Solutions) 35.8% 8,482 32.9% 8,195 -3.4%
    Infrastructure Management 15.7% 3,720 16.5% 4,110 10.5%
    BPO 11.3% 2,677 12.4% 3,089 15.4%

    Revenue by Industry vertical
    (Rs m) 1QFY09 2QFY09 Change
    Financial services 27.5% 6,516 27.5% 6,850 5.1%
    Hi-tech 30.7% 7,274 30.4% 7,572 4.1%
    Telecom 16.5% 3,909 15.7% 3,911 0.0%
    Retail 8.2% 1,943 7.7% 1,918 -1.3%
    Media and Entertainment 5.6% 1,327 5.5% 1,370 3.3%
    Life Sciences 5.9% 1,398 5.8% 1,445 3.3%
    Others 5.6% 1,327 7.4% 1,843 38.9%

  • HCL Tech added a net of 243 employees during the quarter. Attrition came down to 13.4%, from 14.7% during 1QFY09.

  • Operating margins expanded by 0.1% during the quarter. Margins were affected by volatile currency movement, and lower numbers of working days during the quarter.

  • HCL Tech’s net profits grew by 5% QoQ during 2QFY09. This was mainly on account of higher operating profit. The effect of increase in other income was masked by forex losses which the company incurred during the quarter mainly on account of volatility in the rupee against other currency. Excluding the adjustment for these losses from both the quarters, the net profit growth stood at a 13% QoQ.

What to expect?
At the current price of 107, the stock is trading at a multiple of 6.5 our estimated FY11 earnings. The management has indicated caution in light of the ongoing financial crisis in the US and Europe. The company has a healthy order pipeline, as it has inked 20 deals worth US$ 1 bn in the 2QFY09, out of these 20 deals 3 deals are in excess of US$ 100 m each and 5 others in excess of US$ 50 m each. These deals are spread across the telecom, financial services, and media & entertainment verticals. The management has indicated that verticals like media, publishing & entertainment (MPE) are showing strong growth. The company has hinted that it is trying to lock in long-term projects at fixed price, which shall give some stability to its performance. The company has revised its dividend policy. The management believes that at this point of time significant investment in business will bring in higher value to investors. Thus, it has lowered the dividend from current Rs 3 per share per quarter to Rs 2 per share per quarter going forward.

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