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HCL Tech: Forex hedges spoil the show
Oct 29, 2009

Performance summary
  • Topline grows by 4% QoQ during 1QFY10 (financial year begins July). Growth largely led by higher volumes primarily in the US and European markets.
  • Operating margins expand by 0.6% QoQ during the quarter mainly on account cost containment measures particularly in terms of sales and administrative cost.
  • Net profits declined by 3% QoQ during 1QFY10. Profits for the quarter impacted by extraordinary losses on cash flow hedges and other income. A lower forex gain during 1QFY10 as compared to 4QFY09 resulted in lower net profits. Excluding all forex and hedging gains or losses, bottomline grew by 11% QoQ.
  • Adds 665 employees to IT services business during the quarter taking the headcount to 54,443 by end of 1QFY10.
  • Declares an interim dividend of Re 1 per share.


Consolidated Performance
(Rs m) 4QFY09 1QFY10 Change
Sales 29,085 30,314 4.2%
Expenditure 22,644 23,426 3.5%
Operating profit (EBITDA) 6,441 6,888 6.9%
Operating profit margin (%) 22.1% 22.7%  
Other income (116) (63)  
Cash flow hedging gain/(loss) (1,576) (1,554)  
Forex gain/(loss) 690 50 -92.8%
Depreciation 1,197 1,418 18.5%
Profit before tax 4,242 3,903 -8.0%
Tax 935 702 -24.9%
Minority interest & income of equity investee (4) (1)  
Profit after tax/(loss) 3,303 3,200 -3.1%
Net profit margin (%) 11.4% 10.6%  
No. of shares (m) 669.9 670.5  
Diluted earnings per share (Rs)   18.5  
P/E ratio (x)*   17.4  
*On the basis of trailing 12 month

What has driven performance in 1QFY10?
  • HCL Tech recorded a 4% QoQ growth in sales during 1QFY10. This was largely driven by volume growth in the US and European business in the area of infrastructure services and customer applications. Much of the incremental growth came from the infrastructure services business which accounts for 17% of total revenue and grew by 15% QoQ during the quarter. This was followed by the core software services business, which accounts for 71% of the company’s total revenue, grew by 2% QoQ during 1QFY10. The BPO segment (9% of the topline) recorded a marginal growth of 1% QoQ during the quarter.

  • As regards industry verticals, HCL Tech recorded an 11% QoQ growth in both financial services (26% of topline) and retail (7% of topline) verticals. Media publishing and entertainment vertical, which accounts for 7% of HCL Tech’s topline grew by a robust 27% QoQ during 1QFY10. Telecom (13% of topline) and life-sciences (6% of the topline) businesses grew by 8% and 4% QoQ respectively. The performance remained poor for the manufacturing (27% of the topline) vertical which saw a decline of 8% QoQ in revenues.

    Segment-wise performance
    In Rs m 4QFY09 1QFY10 Change
    Core Software 21,148 21,591 2.1%
    Infrastructure Services 5,130 5,894 14.9%
    BPO Services 2,806 2,829 0.8%
    Revenue break-up by service offerings      
    Enterprise application system 6,864 6,639 -3.3%
    Engineering and R&D services 5,642 5,669 0.5%
    Custom Application (Industry Solutions) 8,638 9,306 7.7%
    Infrastructure Management 5,119 5,881 14.9%
    BPO 2,821 2,819 -0.1%
    Revenue break-up by geography      
    US 17131 17794 3.9%
    Europe 8289 8791 6.1%
    Asia Pacific 3665 3729 1.7%
    Revenue by Industry vertical      
    Financial services 7,213 7,973 10.5%
    Manufacturing 8,987 8,306 -7.6%
    Telecom 3,636 3,941 8.4%
    Retail & CPG 1,920 2,122 10.5%
    Media Publishing and Entertainment 1,629 2,061 26.6%
    Life Sciences 1,861 1,940 4.2%
    Energy-Utility & public sector 2,210 2,061 -6.7%
    Others 1,629 1,910 17.3%

  • In terms of client geography, HCL Tech recorded remarkable traction from the US and the European geographies during 1QFY10. Revenues from the US, HCL’s major market, grew by around 4% QoQ, contributing around 59% to total revenues. Business from Europe and Asia Pacific regions grew by 6% and 2% respectively.

  • HCL Tech’s employee count stood at over 54,443 at the end of September 2009. The company added a net of 665 employees during 1QFY10. Attrition level was at 12.8% at the end of the quarter.

  • The company’s operating margins expanded by 0.6% during 1QFY10. This was mainly on account of better volume growth and efficient cost management aided by an offshore utilisation rate of 77.9%.

  • HCL Tech’s net profits declined by 3% QoQ during 1QFY10. Growth in topline and good operating performance was dented by huge amount of unfavorable forex movement resulting in bottom-line decline. Excluding the adjustment for these forex losses from both the quarters, the net profit improved by 11% QoQ. The management indicated that company is adequately hedged and there will be no further hedges at least for the next 2 quarters.

What to expect?
At the current price of 322, the stock is trading at a multiple of 19.5 times our . During the conference call, HCL Tech’s management sounded confident of the company’s performance as well as future growth. The company improved the topline on back of 2.7% volume growth, 2.5% of which was organic growth while 0.2% was due to acquisitions like Axon and UCS. The management informed that the company not only successfully absorbed and integrated these acquisitions but was also able to cross-sell and expand resulting in expansion of operating margins to the pre-acquisition levels.

The company’s business model of constantly pursuing new clients though resulted in a slower growth in the recent quarter as compared to competitors as IT market for new deals remained soft. It is worth noting that many of its bigger peers follow a ‘client-mining’ strategy wherein they focus on getting more business from the existing clients. Remaining cautious about the business environment where the global IT giants have lost revenues to the tune of US$ 2 bn to US$ 4 bn, the company aims at gaining as much as possible from this vendor churning happening in the marketplace. We continue to have a cautious view on the stock.

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