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HCL Tech 3QFY03 net down 25%

Apr 28, 2003

HCL Technologies has posted a negative growth of 25% in its consolidated net profit for 3QFY03, while consolidated revenue growth has been flat sequentially. For the nine months ended March 2003, the company saw its consolidated topline grow by 16%, but continuing pressure on operating margins brought down its net profit by 38%. Operating margins have fallen by 400 basis points in 9mFY03.

Rs m2QFY033QFY03Change9MFY029MFY03Change
Net Sales 4,679 4,658 -0.4% 11,827 13,761 16.4%
Other Income 89 151 69.7% 1,324 307 -76.8%
Expenditure 3,645 3,696 1.4% 8,760 10,751 22.7%
Operating Profit (EBDIT) 1,034 962 -7.0% 3,067 3,010 -1.9%
Operating Profit Margin (%)22.1%20.7%25.9%21.9%
Interest - - - -
Depreciation 219 226 3.2% 400 650 62.5%
Profit before Tax904887-1.9%3,9912,667-33.2%
Extraordinary items0-190-240-1900
Stock-based sales incentive expense/(income)-1-411-3
Tax 75 63 -16.0% 218 267 22.5%
Minority Interest & income of equity investors-24-35-45
Profit after Tax/(Loss) 806 603 -25.2% 3,522 2,168 -38.4%
Net profit margin (%)17.2%12.9%29.8%15.8%
No. of Shares 285.4 285.4 285.4 285.4
Diluted Earnings per share*11.38.516.510.1
P/E Ratio 12.6 16.8 8.6 14.0
(* annualised)

The marginal fall in topline for 3QFY03 was mainly due to a 5% fall in revenues from the company's organic software business (nearly 66% of total revenues in 3QFY03). The company's inorganic initiatives, including the BPO outfit, however, arrested the fall in topline for the March quarter. The BPO business which contributed nearly 9% of consolidated revenues saw a 37% sequential growth in the March quarter. The other inorganic ventures (25% of consolidated revenues) on the other hand saw a 4% sequential growth in revenues.

The consolidated revenue from the software services business has fallen by 3%, mainly on account of a fall in revenue from HCL Technologies. The other software services entities like DSL Software and HCL Jones, on the other hand, reported strong sequential growth in revenues albeit on a smaller base. The software services division of the company seems to have faced pressure on both volumes as well as pricing front. HCL Comnet, which is the infrastructure services arm of the company also reported strong sequential growth in revenues.

Fall on the topline, accompanied by expansionary pressures have taken a toll on the operating profits and consequently on the operating margins of the company. For 3QFY03, operating margins have declined by 140 basis points, while for 9mFY03 operating margins have fallen by 400 basis points. The company added nearly 1,000 employees at the gross level in the March quarter, which has put pressure on margins as the expansion in the workforce has not been complemented by growth in volumes. This, in contrast to peers like Infosys and Wipro, is concerning as both these companies reported robust sequential growth in volumes.

Poor revenue growth and the adverse impact on operating margins has taken a toll on the bottomline in the March quarter as well as for 9mFY03. The fall in bottomline has however been restricted by the growth seen in other income. Not accounting for the same the fall in bottomline would have been further severe at 37%.

At Rs 140, the stock is currently trading at a P/E multiple of 14x its annualised 9mFY03 earnings. The company has done well to grow its inorganic initiatives but the degrowth in its core software services entity HCL Technologies is worrying. While the inorganic initiatives account for nearly 34% of total revenues it may still be a while before they add significantly to the bottomline. Most of the inorganic operations have operating margins lower than the parent entity HCL Technologies. Even if the operating margins of these entities improve it is unlikely that the consolidated margins will improve significantly above the current levels, especially considering the pricing pressures. Investors need to wait and watch the company's performance, especially the inorganic initiatives as they may be the growth trigger going forward.

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