HCL Technologies Ltd has continued to grow its revenue at a brisk pace. The company’s revenue grew by 7.4% in constant currency terms in the September quarter, on the back of 9.1% and 6.9% growth, respectively in the preceding two quarters. Late last week, Infosys Technologies Ltd had reported a 9.3% growth in revenue in constant currency terms. While HCL Tech’s growth rate is lower, the difference isn’t that much. Also, almost all of its industry verticals and service lines have grown at handsome rates, with even business process outsourcing reporting growth after four consecutive quarters of declining revenues.
But one concern investors are having is that the healthy growth in revenue hasn’t translated into cash flow generation. Cash flow from operations stood at a mere $9.9 million (Rs 43.85 crore), or just 1.2% of last quarter’s revenue of more than $800 million. After accounting for capital expenditure of $36.9 million, free cash flow stood at a negative $27 million.
Graphic: Yogesh Kumar/Mint
While the company’s receivables position has improved in terms of debtor days, “unbilled revenue” and “other assets” have risen. Unbilled revenue pertains to that booked in the company’s accounts, without having invoiced customers.
According to the company’s deputy chief financial officer Sandip Gupta, working capital needs rose last quarter because of payments made to vendors and other advances made related to client work, on which customers haven’t been invoiced yet. He adds revenue will flow in from these customers in subsequent quarters.
HCL Tech’s margins fell by around 240 basis points, mainly owing to wage hikes, promotions, and investments in selling, general and administration (SG&A) expenses.
The company has also been consciously increasing its employee bench size, hiring aggressively in the past two quarters. As a result, utilization rates have dropped from around 76% to 70% in the last quarter.
With all of these factors impacting margins last quarter, the moot question is if margins will bounce back in the coming quarters. According to Gupta, margins in the December quarter will be flat at September quarter levels—with efficiency gains expected to offset the impact from higher SG&A costs. He adds that margins will increase in the subsequent two quarters.It must be noted here that while HCL Tech has been growing, its profitability has been falling. The company’s earnings before interest and tax has declined by 8.8% on a year-on-year (y-o-y) basis, even while revenue has grown at a healthy rate of 27.6%. In comparison, Infosys has grown both revenue and profit by 29% on a y-o-y basis. This is one of the reasons HCL Tech’s shares trade at a discount of over 25% compared to Infosys’. If the firm manages to improve margins consistently from current levels, this discount should narrow to some extent.
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