HCL Technologies Ltd’s shares have risen by 75% since the June quarter results began last month, much higher than other large-cap IT firms. Its June quarter results, announced on Tuesday, justify the stock’s outperformance.
The company beat the street by a wide margin, reporting a 7.6% growth by revenue in dollar terms and an 18.4% jump in earnings before interest and tax. This is the highest among large IT companies, easily beating the 10% growth in profit reported by Cognizant Technology Solutions Corp. While the company benefited from favourable currency movements, the growth in revenues and profit is impressive even after adjusting for that.
Revenue grew by 3.9% in constant currency terms and according to the company’s chief financial officer, Anil Chanana, all of this is driven by higher volumes. At the Ebitda (earnings before interest, tax, depreciation and amortization) level, profit margins grew by 80 basis points. One basis point is a hundredth of a percentage point.
According to an analyst at IIFL Capital, one would have expected margins to grow at a higher rate given the decent improvement in revenues. A large part of the company’s growth has come from the infrastructure management services (IMS) segment, which, according to another analyst at a domestic brokerage, has an element of pass-through costs related to equipment.
Graphics: Ahmed Raza Khan / Mint
This could be the reason the IMS segment’s Ebitda margins declined by about 250 basis points last quarter. The company has done well to contain employee costs, keeping its manpower base constant despite growing volumes. Considering that the environment for IT spending continues to be challenging, especially on the pricing front, the higher productivity is welcome.
Another positive is that the Asia-Pacific region grew at a considerably high rate of 9.4% in constant currency terms last quarter. According to Chanana, the higher-than-industry growth of 6.8% in the financial services segment is on account of growth in the Asia-Pacific region. But some analysts are disappointed about the fact that the contribution of the top 20 clients has come down, when calculated on a trailing 12-month basis. In the 12 months ended March, the firm’s top 20 clients accounted for 43.6% of revenues, which dropped to 40.2% in the June quarter.
While the stock has trebled compared with the lows in early March and it’s true that the company’s growth has been superior in the past few quarters, other concerns remain. The company has cancelled some of its forex hedges, but there are still substantial losses sitting in its balance sheet under the head “other comprehensive income”, which is expected to affect reported profit in the current fiscal year.
Edelweiss Securities estimates a forex loss of $130 million (Rs634.4 crore) this year, which could reduce the company’s reported earnings per share of Rs15. Excluding the forex loss, the earnings per share estimate of the broker stands at Rs23-24. Also, the outlook for its recently acquired Axon’s enterprise applications business depends on the pick of discretionary spending by clients in advanced markets. While there are early signs that discretionary spending is picking up, the current slowdown could impact Axon’s performance in the coming quarters.
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