HCL Technologies Ltd, India’s fifth-largest tech vendor by sales, reported net profit of $76.2 million (Rs318.33 crore) for its third quarter ended 31 March, an increase of 76.3% year-on-year and nearly 18% over the October-December months, as its back-office services division contributed more business.
The Noida-based vendor’s revenues for the quarter stood at $362.4 million, which increased 9.5% over the previous quarter and was a 44.1% jump year-on-year. The company surpassed analysts’ expectations of a 6% growth in sales for the quarter.
HCL’s business process outsourcing revenues increased nearly 42% year-on-year to $49.7 million, driven in part by expansion of the back-office division’s staff last quarter, when it hired 1,069 employees.
“Their Ebitda (earnings before interest, tax, depreciation and amortization) margins are higher than expected due to their transformed BPO business,” said Harmendra Gandhi, analyst at Mumbai brokerage Brics Securities. “However, this is a one-off for HCL and such Ebitda expansion will not be there in the next quarter.”
ABN Amro tech analyst Pankaj Kapoor said HCL was seeing the benefits of large deals signed in the last few quarters. HCL signed multi-million-dollar deals with design software company Autodesk, electronics major Teradyne, financial services firm Skandia and insurer DSG last year.
The appreciating rupee, which has strengthened 1.8% against the US dollar in the January-March quarter, will remain a concern for HCL in the coming three months, Gandhi predicted.
“Its impact would depend on how each company manages its currency. For every 1% movement in the rupee, the impact (on margins) is 35 basis points. This quarter, we have seen a 1.55% increase in the rupee, which has resulted in a negative impact of 56 basis points on our operating margins,” said Vineet Nayyar, president of HCL.
A stronger business from Europe, Australia and New Zealand buffered the impact of a weakened US dollar against the rupee. Revenues from clients in Europe grew 14% sequentially over the October-December months and 69% year-on-year, while sales in Pacific Rim expanded 16% sequentially and 83% year on year.
HCL makes 54.5% revenues from the US, 30% European customers and the rest from the Asia-Pacific.
To reduce the impact of the rising rupee on profitability in the months ahead, HCL has taken $900 million worth of currency covers for over a year.
Nayyar said HCL was on course for its targeted growth for fiscal 2007 ending 30 June. “Despite the rupee, you will see 30-40% year-on-year growth in our revenues and profits as well as in the margins,” Nayyar said. “This quarter, we have signed six deals, with five being in the sub-$50 million range and one at over $50 million.”
HCL added 22 new clients and made close to 2,000 hires in the just-gone-by quarter, taking the total employees to over 40,000.
Like most tech companies, wage inflation is also a concern for HCL.
“We are looking at increasing our global wages, a significant portion due on 1 July, by 12-15% and our Indian salaries by 3-5%,” Nayyar said. A salary hike in January in the BPO division had an impact of 0.15% on margins.
HCL runs five lines of businesses: engineering and research and development services, industry solutions, enterprise application services, infrastructure management and transformation services, and BPO services.
The company, which has software development centres located at Noida, Chennai, Bangalore, Gurgaon and Kolkata, will expand office space by 9,200 seats, adding to the 43,500 it already has. The next phase of expansion will be at Nagpur, where the company has the government’s approval for a special economic zone, which will allow it to claim tax benefits on exports.