CEO exit should cap HCL’s re-rating

Investors are likely to wait and see how things shape under the new leadership
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First Published: Thu, Jan 17 2013. 05 20 PM IST
The steady rise in the company’s profitability has helped its stock outperform peers by a huge margin in the past year. Photo: Pradeep Gaur/Mint
The steady rise in the company’s profitability has helped its stock outperform peers by a huge margin in the past year. Photo: Pradeep Gaur/Mint
Updated: Thu, Jan 17 2013. 10 05 PM IST
HCL Technologies Ltd’s stock was the top gainer among Nifty stocks on Thursday, after the company reported better-than-expected results for the December quarter. Revenue rose 3.6% sequentially to $1.15 billion and profit margin expanded, leading to a 5.5% rise in earnings before interest, taxes, depreciation and amortization (Ebitda) to $260.6 million.
Analysts at Kotak Institutional Equities and JPMorgan Chase and Co. had estimated that profit would drop owing to the salary hikes given by the company last quarter as well as due to an increase in selling and marketing investments. The company’s reported Ebitda is Rs.123 crore and Rs.168 crore higher than these analysts’ respective estimates. This is the third straight quarter that margins have increased sequentially; on a year-on-year basis, HCL’s margins have risen by 410 basis points. One basis point is one-hundredth of a percentage point.
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According to chief financial officer Anil Chanana, the increase in profit margin is due to a rise in the proportion of annuity-based revenue, thanks to the transitioning of projects to a steady state. The other reason is an increase in total outsourcing contracts, where the company bills for resources other than people, and gets to keep a share of the savings generated for customers.
The steady rise in the company’s profitability has helped its stock outperform peers by a huge margin in the past year. HCL shares’ have risen by 65.49% in the past year, compared with a 13.71% rise in the CNX IT index. Earlier, the company’s low profit margin was a constant irritant for investors and led to low valuations.
Of course, this has come alongside decent revenue growth. In the December quarter, revenue grew by 13% in dollar terms on a year-on-year basis. Again, growth was led by infrastructure services, which grew by 37% on a year-on-year basis. The company also announced deal wins amounting to more than $1 billion in value during the quarter, which will reassure investors about growth being sustained in the future. The only concern was the drop in employee count in the IT services business, especially with the company already operating at a relatively high utilization of around 77%.
Investors, however, took this in their stride, along with the announcement that Vineet Nayar, chief executive officer and architect of the current growth momentum, will be stepping back from an active operational role. But as one analyst with a foreign brokerage points out, the exit is likely to impact growth in the long term. Investors are likely to wait and see how things shape under the new leadership before going ahead with another significant re-rating of the stock.
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First Published: Thu, Jan 17 2013. 05 20 PM IST
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