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HCL Tech: A decent end to FY15 - Views on News from Equitymaster
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HCL Tech: A decent end to FY15
Aug 24, 2015

HCL Technologies announced its fourth quarter and full year results for FY15 (the company has a June year ending). The company reported a 5.5% QoQ increase in sales and a 5.8% QoQ rise in net profits. Here is our analysis of the results.

Performance summary
  • Consolidated sales increased by 5.5% QoQ in 4QFY15. In constant currency terms sales were up 3.4% QoQ.
  • Operating profits were flat sequentially. The operating margin fell steeply to 21.5% in 3QFY15 as compared to 22.6% 3QFY15. This was largely due to a 7.2% QoQ increase in direct costs.
  • The other income fell by 10.7% QoQ while depreciation & amortization increased 9.7% QoQ.
  • The consolidated net profit increased by 5.8% QoQ helped by a forex gain of Rs 360 m and a steep fall in the tax rate sequentially.
  • The company has declared a dividend of Rs 5 per share.

Consolidated Financial performance
(Rs m) 3QFY15 4QFY15 Change FY14 FY15 Change
Sales 92,670 97,770 5.5% 321,437 367,012 14.2%
Expenditure 71,760 76,770 7.0% 240,643 282,286 17.3%
Operating profit (EBITDA) 20,910 21,000 0.4% 80,794 84,726 4.9%
Operating profit margin (%) 22.6% 21.5%   25.1% 23.1%  
Other income (net of finance costs) 1,970 1,760 -10.7% 5,629 9,748 73.2%
Forex gain/(loss) (180) 360   (441) 735  
Depreciation & Amortization 1,130 1,240 9.7% 6,809 4,038 -40.7%
Profit before tax 21,570 21,880 1.4% 79,173 91,171 15.2%
Tax 4,730 4,060 -14.2% 14,096 18,151 28.8%
Share of profit/(loss) of associates - -   201 399 98.9%
Minority interest - -   183 248 35.3%
Profit after tax/(loss) 16,840 17,820 5.8% 65,095 73,171 12.4%
Net profit margin (%) 18.2% 18.2%   20.3% 19.9%  
No. of shares (m)         1,406.0  
Diluted earnings per share (TTM)         52.0  
P/E ratio (x)*         18.5  
*On the basis of trailing 12 month; # Financial year ends June

What has driven performance in 4QFY15?
  • In terms of the performance metrics, HCL Tech delivered a mixed performance the application development and enterprise segments did well but the engineering services segment was hit badly due to client specific issues in the US.

    Segment-wise performance
    (Rs m) 3QFY15 4QFY15 Change
    Revenue break-up by service offerings
    Enterprise Application Services 13,159 15,057 14.4%
    Engineering and R&D services 17,515 15,839 -9.6%
    Industry Application† Services 25,299 28,158 11.3%
    Infrastructure Management Services 31,971 33,731 5.5%
    BPO 4,726 4,986 5.5%
    Revenue break-up by geography
    US† 53,285 53,089 -0.4%
    Europe 28,728 32,264 12.3%
    RoW 10,657 12,417 16.5%
    Revenue by industry vertical
    Financial services 24,187 27,767 14.8%
    Manufacturing 30,952 30,895 -0.2%
    Telecom & Media 8,340 8,702 4.3%
    Retail & CPG 7,784 8,310 6.8%
    Healthcare 10,379 9,973 -3.9%
    Energy & Public Sector 9,638 9,875 2.5%
    Others 1,390 2,249 61.8%

  • The operating performance was impacted in the quarter due to continuing investments being made in global delivery centers. The company has announced wage hikes at the end of the quarter the impact of which will be spread out over FY16. The onsite wage hike is 2% and offshore wage hike is 6%.

  • At the net level, the pressure at the operating level ensured that the net margin did not improve sequentially.

What to expect?

At the current price of 964 the stock of HCL Technologies is trading at 18.5 times its trailing twelve month earnings.

The company ended FY15 with decent numbers. The deal wins this year have been strong. HCL Tech won about US$ 5 bn worth of deals in the year. However, this is not much of an improvement over last year. Key service lines crossed important milestones during the year: IMS revenues crossed US$ 2 bn, engineering services revenues crossed US$ 1 bn and the financial services vertical crossed US$ 1.5 bn in revenues. The company added 47 clients in the US$ 1 m plus category.

As far as the margins are concerned, we donít believe the company will be able to hold margins in the stated band of 21-22% (excluding cross currency impact). The company will have to invest significantly in training as well as in offshore staff. The core IMS service has seen increasing competition and the managementís strategy for dealing with the challenges posed by the new digital technologies is not conducive for margin expansion.

We believe, with topline growth slowing down and margins under pressure, the companyís future performance will not compare favorably with the past. We are currently updating our financial estimates for the company. We reiterate our view that investors should not buy the stock at these levels.

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