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HCL Tech: Another quarter of robust growth
Apr 20, 2011

HCL Tech has announced the third quarter results of financial year 2010-2011 (3QFY11). The company has reported a 5.6% QoQ and 16.2% QoQ growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Net sales grew by 5.6% QoQ during the quarter. Growth was led by the momentum in its transformational engagements. Growth was driven by good performance across all of the company's segments and geographies.
  • Operating margins improved by 1.0% QoQ to 17.3% from the 16.3% seen during the previous quarter (quarter ended December 2010 or 2QFY11).
  • Net profits increased by 16.2% QoQ. This was on account of lower depreciation costs and higher other income.
  • Added 58 new clients during the quarter. The total number of active clients as at end of March 2011 stood at 453.
  • Added 1,617 (net) employees during the quarter. Total employee base at the end of March 2011 was 73,420. Attrition rate came down marginally to 17.0% as compared to 17.2% seen at the end of the last quarter (2QFY11).
  • Declared an interim dividend of Rs 2 per share (dividend yield 0.4%).


Financial performance
(Rs m) 2QFY11 3QFY11 Change 9MFY10 9MFY11 Change
Sales 38,625     40,779 5.6%     91,396    115,520 26.4%
Expenditure 32,320      33,718 4.3%    72,049      96,278 33.6%
Operating profit (EBITDA) 6,305  7,061 12.0%    19,347 19,242 -0.5%
Operating profit margin (%) 16.3% 17.3%   21.2% 16.7%  
Other income      54   125 131.5%  (337)   183  
Forex gain/(loss)  (133)  (110)      (3,387) (881)  
Depreciation  1,231 1,181 -4.1% 3,878 3,629 -6.4%
Profit before tax  4,995  5,895 18.0%     11,745 14,915 27.0%
Tax  1,024 1,281 25.1% 2,150 3,107 44.5%
Minority interest & income of equity investee -    -        12        2  
Profit after tax/(loss)  3,971 4,614 16.2%      9,607 11,810 22.9%
Net profit margin (%) 10.3% 11.3%   10.5% 10.2%  
No. of shares (m)       673.5 685.7  
Diluted earnings per share (Rs)          22.2  
P/E ratio (x)*         23.0  
*On the basis of trailing 12 month; # Financial year ends June

What has driven performance in 3QFY11?
  • HCL Tech recorded a 5.6%% QoQ growth in sales during the quarter. This was largely driven by performance across all its business segments. The infrastructure services business (23% of sales) grew by 8.3% QoQ while the core software services business (71% of sales) clocked a 5.1% QoQ growth during the quarter. However, BPO segment (5% of sales) recorded a muted growth of 0.4% QoQ during the quarter.

    Segment-wise performance
    (Rs m) 2QFY11 3QFY11 Change
    Core Software 27,609 29,025 5.1%
    Infrastructure Services  8,802  9,531 8.3%
    BPO Services 2,214 2,223 0.4%
    Revenue break-up by service offerings      
    Enterprise application system 8,343 8,808 5.6%
    Engineering and R&D services  7,300 7,585 3.9%
    Custom Application (Industry Solutions) 11,858 12,723 7.3%
    Infrastructure Management 8,691 9,298 7.0%
    BPO 2,433 2,365 -2.8%
    Revenue break-up by geography      
    US  22055 23448 6.3%
    Europe 10274 10725 4.4%
    Asia Pacific 6296 6606 4.9%
    Revenue by Industry vertical      
    Financial services  9,502 10,684 12.4%
    Manufacturing  10,467  11,133 6.4%
    Telecom 4,172 4,200 0.7%
    Retail & CPG 3,515 3,548 0.9%
    Media Publishing and Entertainment  2,627  2,691 2.5%
    Life Sciences 3,245 3,262 0.5%
    Energy-Utility & public sector 2,781 2,977 7.0%
    Others  2,240 2,284 1.9%

  • With regards to the industry verticals, HCL Tech recorded the best performance in ‘Financial Services' vertical where sales grew by 12.4% QoQ during the quarter. This was followed by the ‘energy & utilities' vertical which grew by 7% QoQ. ‘Manufacturing', ‘Media Publishing and Entertainment' verticals recorded growth of 6.4% and 2.5% QoQ respectively during the quarter. The other segments witnessed an increase as well.

  • Based on service offerings, HCL registered a growth of close to 7% QoQ each in its Infrastructure Management Services (IMS) and custom application (Industry Solutions) segments. The Engineering and R&D segment and Enterprise Application System (EAS) business witnessed a growth of 3.9% QoQ and 5.6% QoQ respectively.

  • HCL Tech recorded positive traction across all the geographies. Revenues from US saw an increase of 6.3% QoQ. Revenues from Asia Pacific and Europe grew by 4.9% QoQ ad 4.4% QoQ as well respectively.

  • HCL signed 11 transformational deals this quarter across service lines, verticals and geographies. 8 of these deals have been won from existing customers.

  • HCL Tech added 58 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 March 2011 stood at 453.

  • Operating margins was up by 1.0% QoQ during the quarter. This was on account of lower operating expenses (as % of total revenues) during the quarter.

  • HCL Tech's net profits improved by 16.2% QoQ during the quarter. This was on account of lower depreciation charges during the quarter. It was also aided by a whopping 131% QoQ increase in the other income. This offset the impact of higher tax rates. Tax rates have gone up from 20.5% in the previous quarter to 21.7% in the current quarter.

What to expect?
At the current price of 522, the stock is trading at a multiple of 16.8 times our estimated FY13 earnings (ResearchPro subscribers, kindly click here).

As per the management, the growth in the current quarter was driven by cross selling and up selling to existing clients as well as from the new clients. The growth was led by volumes.

Going forward, the management expects pricing to remain stable. It is interesting to note that they do not see any major upswing in the prices in the near term. This is due to concerns over the overall macroeconomic environment as well as intense competition in the sector. For the full year 2011, the management expects margins to remain at the same levels as those of last year. In the long term, the management expects better employee utilization, improvement in product mix and efficiency in delivery to drive the margins.

The management expects a lot of churning among software vendors. They expect that there will be cut down on legacy projects like maintenance. New projects related to business intelligence, better analytics, integration, cloud etc will take the front. Discretionary short term projects are expected to drive the growth in near term.

Management has also identified certain areas of gaps in their business and would look at filling these through inorganic growth. The management is currently looking for the right opportunities to fit these gaps. However, it declined from mentioning the exact areas in which these gaps exist. The company is also looking to expand its business in new geographies like South Africa & Latin America.

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