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HCL Technologies: Disappointing performance - Views on News from Equitymaster
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  • Oct 22, 2002

    HCL Technologies: Disappointing performance

    HCL Technologies numbers are disappointing. The company’s revenues have grown by just 2% sequentially. The bottomline has grown by 10% on a QoQ basis. However, the numbers for 4QFY02 include a write off of Rs 367 m. Excluding the write-off from 4QFY02 numbers, HCL Technologies’ net profit has infact fallen by a steep 28% sequentially.

    The fall in bottomline is due to a drop in operating margins and decline in other income. On a YoY basis, while the revenues have grown by 19%, net profits have declined by 22% due to a steep fall in other income. The other income has declined by 82% YoY. Excluding other income and write-offs, the net profit figure has declined 18% sequentially and 10% on a YoY basis.

    (Rs m) 4QFY02 1QFY03 Change
    Sales 4,323 4,424 2.3%
    Other Income 227 81 -64.3%
    Expenditure 3,273 3,410 4.2%
    Operating Profit (EBDIT) 1,051 1,015 -3.4%
    Operating Profit Margin (%) 24.3% 22.9%  
    Interest - -  
    Depreciation 177 205 16.0%
    Profit before Tax 1,101 891 -19.1%
    Extra-ordinary item income/(expense) (367) 0  
    Stock based sales incentive expense/ (income) (14) 2 -115.4%
    Tax 58 129 120.0%
    Profit after Tax/(Loss) 690 760 10.2%
    Net profit margin (%) 16.0% 17.2%  
    Diluted number of shares (m) 285.4 285.4  
    Diluted Earnings per share* 9.7 10.7  
    P/E (x)   17.5  

    The company’s core software business grew by 2.3% sequentially. This was on the back of a 4.7% growth in volumes. The growth in volumes was offset by a 1.4% decline in billing rates. The company’s performance is certainly disappointing on this front. Other software majors like Wipro and Infosys have posted double digit sequential growth in volumes in the same quarter.

    Revenue mix 4QFY02 % Contribution 1QFY03 % Contribution Change
    Technology development services 1,600 37% 1,460 33% -8.7%
    Networking services 519 12% 310 7% -40.3%
    Software product engineering 778 18% 752 17% -3.3%
    Application engineering 1,210 28% 1,681 38% 38.9%
    IT enabled services 216 5% 221 5% 2.3%
    Total 4,323 100.0% 4,424 100.0% 2.3%

    The steep decline in revenues from networking and technology development services seem to the reasons for the company’s weak growth in revenues. While the technology development services group addresses the technology domain that is passing through a rough patch, the steep fall in revenues from HCL Comnet (networking services) is rather inexplicable. However, the company has mentioned that it is restructuring the business model of the subsidiary. The company will now focus on providing IT infrastructure management services to global customers. Traditionally, the focus has been domestic clients.

    The fall in operating margins on a consolidated basis was due to a steep rise in SG&A (selling, general and administrative) expenses. The figure has jumped 11% on a QoQ basis and 32% on a YoY basis, thus taking a toll on the company’s operating margins. The future growth of IT services companies will have to be based on volume growth. Consequently, software companies have ramped up on their marketing expenses. While a break up is not available, the increased spending could have been towards increasing the marketing infrastructure. During the quarter the company added 20 new clients taking the total number of clients to 349.

    At the current market price of Rs 186, the stock is trading at a P/E multiple of 18x it 1QFY03 annualised earnings. Thus, the performance for the quarter is lackluster due to weak growth in revenues. This is largely due to a bad market environment. However, the company has shown its resilience by ramping up revenues from other areas like application engineering swiftly. Thus, going forward there is strong possibility that the company due to its size and skill sets benefits from the increased interest in outsourcing. However, in the near term the stock price is likely to remain depressed due to the company’s disappointing performance.



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