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HCL Tech: Forex losses hit bottomline - Views on News from Equitymaster

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HCL Tech: Forex losses hit bottomline
Apr 23, 2009

Performance summary
  • Topline grows by 41% YoY during 9mFY09 and 16% QoQ during 3QFY09 (financial year ends in June). Growth largely led by volume growth and acquisition of Axon.
  • Operating margins decline by 0.5% QoQ during the quarter mainly on account of volatile currency movement.
  • Net profits decline by 42% QoQ during 3QFY09 largely on account of forex losses.
  • Adds 68 new clients and 332 employees during the quarter; attrition rate for IT services declines to 13.2% in 3QFY09, from 13.4% in 2QFY09.
  • Announces dividend of Re 1 per share (dividend yield of 0.8%).


Financial performance: A snapshot...
(Rs m) 2QFY09 3QFY09 Change 9mFY08 9mFY09 Change
Sales 24,691 28,615 15.9% 54,706 76,999 40.8%
Expenditure 19,307 22,512 16.6% 42,851 60,201 40.5%
Operating profit (EBITDA) 5,384 6,103 13.4% 11,855 16,798 41.7%
Operating profit margin (%) 21.8% 21.3%   21.7% 21.8%  
Other income 1,206 (24) -102.0% 1,342 1,740 29.7%
Cash Flow hedge gain/(loss) 217 (1,255)   - -  
Forex gain/(loss) (1,422) (761)   (199) (4,195) 2013.4%
Depreciation 971 1,417 45.9% 2,183 3,296 51.0%
Profit before tax 4,414 2,646 -40.1% 10,816 11,047 2.1%
Tax 684 485 -29.1% 1,069 1,608 50.4%
Minority interest & income of equity investee (1) 17   (42) 2  
Profit after tax/(loss) 3,729 2,178 -41.6% 9,789 9,437 -3.6%
Net profit margin (%) 15.1% 7.6%   17.9% 12.3% -31.5%
No. of shares (m)       670 670  
Diluted earnings per share (Rs)         16.2  
P/E ratio (x)*         7.4  
*On the basis of trailing 12 month

What has driven performance in 3QFY09?
  • HCL Tech recorded a 16% QoQ growth in sales during 3QFY09. This was largely driven by the core service business, which grew by 22% QoQ. This segment accounts for 75% of the company’s total revenue. This was followed by growth in infrastructure business which accounts for 15% of total revenue and grew by 5% QoQ during the quarter. However, the BPO segment recorded a decline of 7% QoQ. The management has indicated in its conference call that decline in the BPO business is in line with the company’s strategy to reduce its dependence on the BPO segment. As a matter of fact, the company is planning to reduce its revenue from voice based BPO business and grow its business from platform based BPO services.

    Segmental performance
    (Rs m) 2QFY09 3QFY09 Change
    Core Software      
    Revenue 17,511 21,430 22.4%
    % of revenues 70.9% 74.9%  
    EBITDA margins 23.9% 22.0%  
    EBIT margins 20.3% 17.2%  
    Infrastructure Services      
    Revenue 4,115 4,328 5.2%
    % of revenues 16.7% 15.1%  
    EBITDA margins 19.5% 22.0%  
    EBIT margins 15.0% 16.1%  
    BPO Services      
    Revenue 3,066 2,857 -6.8%
    % of revenues 12.4% 10.0%  
    EBITDA margins 13.0% 15.3%  
    EBIT margins 8.0% 10.5%  

  • As regards industry verticals, HCL Tech recorded the best performance in the ‘Energy-Utility and public sector’ segment. This segment has been added recently after acquisition of Axon. The segment grew by whopping 222%, though the numbers won’t be fairly comparable. This was followed by ‘manufacturing’ vertical, which grew by 17% QoQ during the quarter. ‘Retail’ and ‘media & entertainment’ verticals also recorded healthy sales growth of 4% QoQ and 5% QoQ during the quarter. However, the ‘banking and financial service’ and ‘telecom’ verticals registered declines of 1.3% and 11% QoQ respectively mainly on account of financial crisis in the US and economic slowdown in other western countries.

    Revenue by Industry vertical
    (Rs m) 2QFY09 3QFY09 Change
    Financial services 27.7% 6,839 23.6% 6,753 -1.3%
    Manufacturing 30.0% 7,407 30.3% 8,670 17.1%
    Telecom 15.8% 3,901 12.1% 3,462 -11.2%
    Retail & CPG 7.7% 1,901 6.9% 1,974 3.9%
    Media Publishing and Entertainment 5.5% 1,358 5.0% 1,431 5.4%
    Life Sciences 5.9% 1,457 6.3% 1,803 23.7%
    Energy-Utility & public sector 3.2% 790 8.9% 2,547 222.3%
    Others 4.2% 1,037 6.9% 1,974 90.4%

    Based on service offerings, HCL registered robust growth its EAS (Enterprise application system) segment. EAS grew by 127% QoQ during the quarter. This was mainly on account of Axon’s acquisition.

    Revenue break-up by service offerings
    (Rs m) 2QFY09 3QFY09 Change
    Enterprise application system 12.5% 3,086 24.5% 7,011 127.1%
    Engineering and R&D services 25.6% 6,321 22.0% 6,295 -0.4%
    Custom Application (Industry Solutions) 32.8% 8,099 28.4% 8,127 0.3%
    Infrastructure Management 16.7% 4,123 15.1% 4,321 4.8%
    BPO 12.4% 3,062 10.0% 2,862 -6.5%

  • HCL Tech added a net of 332 employees during the quarter. Attrition came down to 13.2%, from 13.4% during the previous quarter.

  • HCL Tech’s operating margins declined by 0.5% during the quarter. The operating margins were affected by volatile currency movement.

  • HCL Tech’s net profits grew by 42% QoQ during 3QFY09. This was mainly on account of higher forex losses. Excluding the adjustment for these losses from both the quarters, the net profit declined by 15% QoQ.

What to expect?
At the current price of 120, the stock is trading at a multiple of 7.3 times our estimated FY11 earnings. The management has indicated caution in light of the ongoing financial crisis in the US and Europe, and has indicated that verticals like infrastructure management, manufacturing and Energy-Utility & public sector are witnessing strong growth, while BFSI and telecom verticals are bearing the brunt of economic slowdown.

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