BackHCL Technologies faces margin worries
HCL reported Ebit margin of just 21.3% for March quarter, 250 basis points lower on a sequential basis
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Mumbai: It appears to be a season of earnings disappointments in the information technology (IT) services sector. HCL Technologies Ltd’s shares fell over 9% in early trading after the company announced weaker-than-expected results for the March quarter. The dip in stock price follows similar sharp drops in shares of Tata Consultancy Services Ltd (TCS) and Mindtree Ltd after their results.
Like its peers, HCL Technologies had, through a pre-results update, warned investors to tone down expectations last month. The company had said that its operating profit margin would fall in the 21-22% range in the March quarter, representing a decline of at least 180 basis points compared with the preceding quarter. But, hardly anyone was expecting such a sharp fall, with one analyst saying that margin assumptions for the next year would have to be cut by 100 basis points if indeed margins fell to about 22% in the March quarter.
On Tuesday, HCL reported an earnings before interest and tax (Ebit) margin of just 21.3%, 250 basis points lower on a sequential basis. While revenue growth was decent at 2.7%, higher than the 1.6% growth reported by TCS, investors are clearly worried about the drop in margins.
As analysts at Kotak Institutional Equities had pointed out in a note to clients earlier this year, HCL’s twin exposure to long-tenured IMS (infrastructure management services) contracts and the European region puts it at the highest risk on account of the sharp fall in the value of the euro and the pound. The sharp depreciation in these currencies may require rate adjustments to protect margins, although this won’t be possible with most IMS contracts.
HCL shares have now fallen by 10% since the beginning of the earnings season and by 12% since its pre-results update on 31 March, reflecting the fall in earnings that will occur with a reset in margin assumptions, as well a climb-down on valuation multiples.
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