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HCL Tech: The end of a great year - Views on News from Equitymaster
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HCL Tech: The end of a great year
Aug 11, 2014

HCL Technologies (HCL Tech) announced its fourth quarter (4QFY14) of financial year 2013-2014 (the company has a June year ending). The company reported a 25.7% YoY growth in sales and a 61.1% YoY increase in net profits for FY14. Here is our analysis of the results.

Performance summary
  • Standalone net sales grew by 17.6% QoQ in 4QFY14 (The company has a June year ending). For the full year FY14 Consolidated net sales grew by 25.7% YoY.
  • Operating profits grew impressively by 42.7% YoY in FY14 while the operating margin improved to 25.1% in FY14 as compared to 22.1% FY13.
  • The consolidated net profit grew by a rapid pace of 61.1% YoY in FY14.

Consolidated Financial performance
(Rs m) 3QFY14 4QFY14 Change FY13 FY14 Change
Sales 40,459 47,714 17.9% 255,811  321,437 25.7%
Expenditure 23,053 23,722 2.9% 199,199 240,643 20.8%
Operating profit (EBITDA) 17,406 23,993 37.8% 56,612 80,794 42.7%
Operating profit margin (%) 43.0% 50.3%   22.1% 25.1%  
Other income 1,699 2,353 38.5% 3,066 6,774 120.9%
Finance costs 192 225   1,056 1,145  
Forex gain/(loss) (294) 149   445 (441)  
Depreciation 1,190 1,272 6.9% 6,368 6,809 6.9%
Profit before tax 17,429 24,998 43.4% 52,699 79,173 50.2%
Tax 3,303 5,166 56.4% 12,253 14,096 15.0%
Share of profit/(loss) of assosiates       (2) 201  
Minority interest - -   43 183  
Profit after tax/(loss) 14,125 19,832 40.4% 40,401 65,095 61.1%
Net profit margin (%) 34.9% 41.6%   15.8% 20.3%  
No. of shares (m)         700.0  
Diluted earnings per share(TTM) (Rs)         93.0  
P/E ratio (x)*         16.4  
*On the basis of trailing 12 month; # Financial year ends June

What has driven the performance in FY14?
  • The company has had a superb year in FY14. The growth was fairly broad based across verticals, services and geographies. However, the top growth driver for the company remains the Infrastructure Management Services (IMS) division. IMS now contributes nearly 35% of revenues for the HCL Tech.

  • While the operating performance of the company was also excellent in FY14 the net profit was boosted by the 120.9% YoY growth in other income figure.
What to expect?

HCL Technologies has posted stellar numbers for the year. It is unlikely that such a performance will be sustained going forward. The management has re-iterated its confidence of at least maintaining an industry level growth rate going forward.

The key growth driver for the company over the years has been IMS but this division has witnessed a moderation in growth in the last two quarters. On the other hand the company's software services division continued to lag behind.

While the company's order book is extremely healthy, most of the large deals that it has won remain in the IMS space. These deals also have a longer execution time and can be prone to delays. Unless the growth in the company's software services division (which contributes 65% of revenues) picks up, it is hard to have confidence in the sustainability of the growth momentum. Also the management has indicated that the margin improvement may not continue going forward.

The company has also not shown much of pick up in terms of deal wins in the new digital technologies space. It remains to be seen if the company can become a leader on this front.

The stock currently trades 16.4 times its trailing twelve months (TTM) earnings. Considering the risk profile of the company especially the risks that it faces to its margins and its key growth engine, Infrastructure Management Services (IMS), as well as the stretched valuations, we recommend investors do not buy the stock.

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