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HCL Tech: Core software leads the way
Oct 16, 2008

Performance summary
    • Topline grows by 9% QoQ during 1QFY09 (financial year starts in July).

    • Growth largely on account of higher volumes and good performance from the IT services business, especially core software segment.

    • Operating margins decline by 1% QoQ during the quarter mainly on account of contraction of margin in the BPO segment.

    • Net profits grow by 1.5 times largely owing to lower forex loss compared to previous quarter. Excluding this adjustment, net profit growth stands at 3% QoQ.

    • Adds a net of 1,973 employees during the quarter; Attrition rate for IT services declines to 14.7% in 1QFY09, from 14.8% in 4QFY08.



    Financial performance: A snapshot…
    (Rs m) 4QFY08 1QFY09 Change
    Sales 21,688 23,693 9.2%
    Expenditure 16,604 18,382 10.7%
    Operating profit (EBITDA) 5,084 5,311 4.5%
    Operating profit margin (%) 23.4% 22.4%  
    Other income 355 558 57.2%
    Forex gain / (loss) (2,999) (974) -67.5%
    Depreciation 850 908 6.8%
    Profit before tax 1,590 3,987 150.8%
    Tax 203 439 116.3%
    Minority interest & income of equity investee (23) (14) -39.1%
    Profit after tax/(loss) 1,410 3,562 152.6%
    Net profit margin (%) 6.5% 15.0%  
    No. of shares (m)   678.8  
    Diluted earnings per share (Rs)   17.3  
    P/E ratio (x)*   9.1  
    *On the basis of trailing 12 month

    What has driven performance in 1QFY09?
      • HCL Tech recorded a 9% QoQ growth in sales during 1QFY09. This was largely driven by the core software business (accounts for 73% of total revenue), which grew its sales by 8% QoQ. This was followed by growth in infrastructure which accounts for 16% of total revenue and grew by 13% QoQ. The BPO segment recorded growth of 10% QoQ during the quarter.

        Segmental performance
        (Rs m) 4QFY08 1QFY09 Change
        Core Software      
        Revenue 15,976 17,301 8.3%
        % of revenues 73.7% 73.0%  
        EBITDA margins 23.7% 23.7%  
        EBIT margins 20.1% 20.2%  
        Infrastructure Services      
        Revenue 3,280 3,709 13.1%
        % of revenues 15.1% 15.7%  
        EBITDA margins 18.7% 18.9%  
        EBIT margins 14.0% 14.5%  
        BPO Services      
        Revenue 2,433 2,683 10.3%
        % of revenues 11.2% 11.3%  
        EBITDA margins 28.3% 18.9%  
        EBIT margins 23.1% 13.5%  

      • Based on industry verticals, HCL Tech recorded the best performance in the ‘hi-tech’ vertical, which provides technology solutions for semiconductor and chip design. This vertical recorded sales growth of 10% QoQ during 1QFY09 (the segment accounts for 31% of revenue). Despite the ongoing crisis in the banking and financial services industry in the US, the company’s BFSI segment managed to grow its sales by 10% QoQ. However the management has indicated of some lost sales from a major client in the vertical.

        Revenue break-up
        Revenue break-up by service offerings          
        (Rs m) 4QFY08 1QFY09 Change
        Enterprise application system 10.8% 2,342 10.9% 2,583 10.3%
        Engineering and R&D services 26.7% 5,791 26.3% 6,231 7.6%
        Custom Application (Industry Solutions) 36.2% 7,851 35.8% 8,482 8.0%
        Infrastructure Management 15.1% 3,275 15.7% 3,720 13.6%
        BPO 11.2% 2,429 11.3% 2,677 10.2%
        Total revenues   21,688   23,693 9.2%
        Revenue by Industry vertical          
        (Rs m) 4QFY08 1QFY09  
        Financial services 27.3% 5,921 27.5% 6,516 10.0%
        Hi-tech 30.6% 6,637 30.7% 7,274 9.6%
        Telecom 16.0% 3,470 16.5% 3,909 12.7%
        Retail 8.8% 1,909 8.2% 1,943 1.8%
        Media and Entertainment 5.6% 1,215 5.6% 1,327 9.2%
        Life Sciences 5.7% 1,236 5.9% 1,398 13.1%
        Others 6.0% 1,301 5.6% 1,327 2.0%
        Total revenues   21,688   23,693 9.2%

      • HCL Tech added a net of 1,973 employees during the quarter. Incidentally, a large part of the net addition came through lateral hiring. The company achieved success in controlling attrition, which came down to 14.7% this quarter from 14.8% last quarter.

      • HCL Tech’s operating margins contracted by 1% during the quarter. The contraction in margins can be attributed to the fact that margin of BPO segment declined by 9.6% as company integrated two of its acquired companies – Liberata Financial Service and Control Point Solutions – during the quarter.

      • HCL Tech’s net profits grew by 153% QoQ during 1QFY09. This was mainly on account of lower forex losses compared to previous quarter that the company incurred due to volatility in the rupee against the dollar. Exclude the adjustment for these losses from both the quarters, the net profit growth stands at a marginal 3% QoQ.

      What to expect?
        At the current price of 157, the stock is trading at a multiple of 9.1 times its trailing twelve-months earnings. The management has indicated caution in light of the ongoing financial crisis in the US and Europe. The company has a healthy order pipeline, as it closed eight deals worth US$ 270 m during 1QFY09. These deals are spread across the telecom, financial services, and media & entertainment verticals. The company has hinted that it is trying to lock in long-term projects at fixed price, which shall give some stability to its performance going forward.

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