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HCL Tech: Good topline performance - Views on News from Equitymaster
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HCL Tech: Good topline performance
Mar 3, 2015

HCL Technologies (HCL Tech) announced its second quarter (2QFY15) of financial year 2014-2015 (the company has a June year ending). The company reported a 6.3% QoQ growth in sales and a 2.2% QoQ increase in net profits. Here is our analysis of the results.

Performance summary
  • Consolidated sales grew by 6.3% QoQ in 2QFY15. In constant currency terms sales were up 6.2% QoQ.
  • Operating profits increased by 5.8% QoQ. However, the operating margin fell to 25% in 2QFY15 as compared to 25.1% 1QFY15. This was due to a 9.2% QoQ increase in SG&A costs which negated the sequential growth in sales.
  • The other income fell sharply by 43.9% QoQ
  • The consolidated net profit grew by 2.2% QoQ the bottomline was impacted due to the fall in other income.
  • The company has declared an interim dividend of Rs 8 per share.
  • The company has also declared a 1:1 bonus issue.

Consolidated Financial performance
(Rs m) 1QFY15 2QFY15 Change 1HFY14 1HFY15 Change
Sales 87,350 92,830 6.3% 161,450 180,180 11.6%
Expenditure 65,430 69,640 6.4% 119,270 135,070 13.2%
Operating profit (EBITDA) 21,920 23,190 5.8% 42,180 45,110 6.9%
Operating profit margin (%) 25.1% 25.0%   26.1% 25.0%  
Other income (net of finance costs) 3,580 2,010 -43.9% 2,270 5,590 146.3%
Forex gain/(loss) (530) 150   (3,940) (380)  
Depreciation 1,040 1,090 4.8% 3,830 2,130 -44.4%
Profit before tax 23,930 24,260 1.4% 36,680 48,190 31.4%
Tax 5,190 5,100 -1.7% 7,570 10,290 35.9%
Minority interest 10 10   - 20  
Profit after tax/(loss) 18,730 19,150 2.2% 29,110 37,880 30.1%
Net profit margin (%) 21.4% 20.6%   18.0% 21.0%  
No. of shares (m)         702.4  
Diluted earnings per share (TTM)         105.2  
P/E ratio (x)*         19.3  
*On the basis of trailing 12 month; # Financial year ends June

What has driven the performance in 2QFY15?
  • In terms of the performance metrics, HCL Tech delivered a fairly good performance in the quarter. Growth was led by the engineering services, the healthcare vertical and the US geography.

    Segment-wise performance
    (Rs m) 1QFY15 2QFY15 Change
    Revenue break-up by service offerings
    Enterprise Application Services 13,714 14,296 4.2%
    Engineering and R&D services 14,937 16,988 13.7%
    Industry Application  Services 24,196 25,064 3.6%
    Infrastructure Management Services 30,136 31,934 6.0%
    BPO 4,368 4,549 4.1%
    Revenue break-up by geography
    US  49,178 53,284 8.4%
    Europe 28,214 29,427 4.3%
    RoW 9,958 10,118 1.6%
    Revenue by industry vertical
    Financial services 24,633 24,693 0.2%
    Manufacturing 28,214 30,541 8.2%
    Telecom & Media 7,599 7,798 2.6%
    Retail & CPG 8,298 9,005 8.5%
    Healthcare 8,560 10,304 20.4%
    Energy & Public Sector 8,124 8,819 8.6%
    Others 1,922 1,671 -13.0%

  • At the operating level, wage hikes were the primary reason for the muted operating performance. This was along expected lines.

  • At the net level, the sequential fall in operating margins and a significant sequential fall in the other income weighed heavily on the bottomline. The net profit increased by just 2.2% QoQ.
What to expect?

At the current price of 2,025 the stock of HCL Technologies is trading at 19.3 times its trailing twelve month earnings.

The company's performance was good in 2QFY15. Growth in IMS once again drove the company's performance. This division now contributes 34.4% of the company's revenues. The software services segment performed decently in this quarter largely due to the growth in the healthcare vertical.

The margins were under pressure yet again in this quarter. This is clearly a result of wage hike cycle underway in the company. The management stated that they would allocate resources to verticals and services as and when required and were not dependent completely on IMS for growth. However, this will remain challenging for the company.

The deal momentum remains strong. 15 large deals were signed in the quarter. The pipeline remains strong for the company. However, the company is yet to show that is has let go of its dependence on the IMS segment from topline growth. Margins too will remain under pressure in the short to medium term.

Despite the challenges that face it, the long term prospects of the company are fairly sound. However, the stock has run up way ahead of the fundamental business prospects. Thus, we re-iterate our view that investors should not buy the stock at these levels.

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