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HCL Tech: Better volumes aid topline
Aug 26, 2009

Performance summary
  • Topline grows by 40% YoY during FY09 (financial year ended June 2009) and 2% QoQ during 4QFY09. Growth largely led by higher volumes.
  • Operating margins expand by 0.4% YoY during the year mainly on account cost containment measures particularly in the core software services.
  • Net profits grow by 52% QoQ during 4QFY09 and 14% YoY during FY09. Profits for the year impacted by extraordinary losses on cash flow hedges and forex transactions.
  • Adds 37 new clients and 190 employees during the quarter.
  • Proposes dividend of Re 1 per share.


Financial performance
(Rs m) 3QFY09 4QFY09 Change FY08 FY09 Change
Sales 28,615 29,085 1.6% 75,670 105,910 40.0%
Expenditure 22,512 22,644 0.6% 59,455 82,845 39.3%
Operating profit (EBITDA) 6,103 6,441 5.5% 16,215 23,065 42.2%
Operating profit margin (%) 21.3% 22.1%   21.4% 21.8%  
Other income (24) (116)   1,698 1,624 -4.4%
Cash flow hedging gain/(loss) (1,255) (1,576)   725 (2,440)  
Forex gain/(loss) (761) 690   (3,067) (2,461) -19.8%
Depreciation 1,417 1,197 -15.5% 3,033 4,493 48.1%
Profit before tax 2,646 4,242 60.3% 12,538 15,295 22.0%
Tax 485 935 92.8% 1,271 2,544 100.2%
Minority interest & income of equity investee 17 (4)   (19) 27  
Profit after tax/(loss) 2,178 3,303 51.7% 11,248 12,778 13.6%
Net profit margin (%) 7.6% 11.4%   14.9% 12.1%  
No. of shares (m)       670.4 670.2  
Diluted earnings per share (Rs)         19.1  
P/E ratio (x)*         15.9  
*On the basis of trailing 12 month

What has driven performance in FY09?
  • HCL Tech recorded a 40%% YoY growth in sales during FY09. This was largely driven by all round performance across all its business segments. The core software services business, which accounts for 73% of the company’s total revenue, grew by 40% YoY during FY09. This was followed by growth in infrastructure services business which accounts for 16% of total revenue and grew by 50% YoY during the year. The BPO segments (11%) recorded growth of 26% YoY during FY09.

    Segmental performance
    (Rs m) 3QFY09 4QFY09 Change
    Core Software 21,430 21,148 -1.3%
    Infrastructure Services 4,328 5,130 18.5%
    BPO Services 2,857 2,806 -1.8%
    Revenue break-up by service offerings      
    Enterprise application system 7,011 6,864 -2.1%
    Engineering and R&D services 6,295 5,642 -10.4%
    Custom Application (Industry Solutions) 8,127 8,638 6.3%
    Infrastructure Management 4,321 5,119 18.5%
    BPO 2,862 2,821 -1.4%
    Revenue break-up by geography      
    US 17455 17131 -1.9%
    Europe 7898 8289 5.0%
    Asia Pacific 3262 3665 12.3%

  • As regards industry verticals, HCL Tech recorded the best performance in the ‘energy- utility and public sector’ segment a major chunk of which came through Axon. The segment, for instance, multiplied its sales by around 7 times during 4QFY09 as compared to 4QFY08. This was followed by the ‘manufacturing’ vertical which contributed around 31% of the revenue and grew by 36% YoY during 4QFY09. ‘Life sciences’, ‘financial services’ and ‘media and entertainment’ verticals respectively recorded robust growth of 51% YoY, 22% YoY and 35% YoY during the quarter.

    Based on service offerings, HCL registered strong growth of 131% YoY in its Enterprise Application System (EAS) business wherein the company implements critical enterprise software solutions for various businesses. It is worth noting that HCL has been aggressively focusing on this segment and even acquired firms like Axon and UCS to enhance EAS capabilities. Growth of around 52% was witnessed in the Infrastructure Management Services (IMS) business. Healthy traction has been registered in the BPO, Engineering and R & D services and custom application domain.

  • In terms of client geography, HCL Tech recorded remarkable traction from all the geographies during FY09. Revenues from the US, HCL’s major market, grew by around 49% YoY, contributing around 60% to total revenues. Business from Europe and Asia Pacific regions grew by 32% and 23% respectively. During 4QFY09 however, much of the traction came from the Asia Pacific and European regions.

  • HCL Tech added 37 new clients during the quarter where some of the new wins include Dr. Pepper Snapple Group, Sony Corporation, Nokia Corporation and Agilent Technologies. During the year, the total number of active client grew by 88 and the total client base at the end of June 2009 stood at 367.

  • HCL’s employee count stood at over 54,200 at the end of June 2009. The company added a net of 190 employees during 4QFY09, and 3,475 employees during FY09. Attrition rate for IT services declined to 13% in 4QFY09, from 13.2% in 3QFY09. It was 14.8% at the end of FY08.

  • HCL Tech’s operating margins expanded by 0.4% during FY09 and 0.8% during 4QFY09. This improvement was mainly on account of better volume growth and efficient cost management.

  • HCL Tech’s net profits grew by 14% YoY during FY09. Robust growth in topline and good operating performance together with lower depreciation charges resulted in growth in bottomline. However, forex volatility impacted the net profits negatively. Excluding the adjustment for these forex losses from both the years, the net profit improved significantly by 30% YoY.

What to expect?
At the current price of 304, the stock is trading at a multiple of 18.5 times our estimated FY11 earnings. Despite the global downturn that plagued the entire IT sector all through the year, HCL Tech has posted better than expected financial performance during FY09, though duly helped by the integration of Axon.

Nevertheless, the management of the company continues to remain cautious about the changing business environment. We have a negative view on the stock. Apart from high valuations, we have issues with the management’s past decision-making regarding its inorganic growth initiatives.

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