The March quarter results of HCL Technologies Ltd seem disappointing at first—its IT services business grew by just 5.7% quarter-on-quarter, after expanding by more than 8% in each of the past seven quarters. But, growth was impacted partly due to some one-off factors. For instance, in the infrastructure management services (IMS) business, the company cut down the low-margin material component of the business to about 2.5% of revenues (previously 4%). Adjusted for this, growth in the IMS segment as well as the overall IT services business was healthy.
The business process outsourcing (BPO) services segment grew by just 1.9% quarter-on-quarter, but that’s primarily because one of the company’s largest clients is moving out. This client had accounted for 13% of BPO revenue in the previous financial year, but that had dropped to less than 5% by December. The declining trend has continued, and does not come as a surprise. In fact, about three-fourths of the employees added by the company in the past quarter were in its BPO division, which indicates that growth should now pick up. The company’s profit margin improved and core earnings grew by as much as 12.5% sequentially in rupee terms.
The markets haven’t missed these details—the HCL stock is among the top performers in the past two trading sessions with gains of more than 13%. Even after this sharp rise, the stock trades at just 13 times trailing earnings, a huge 35% discount to Infosys Technologies Ltd’s valuations. And what’s more, the company’s growth rates currently are much more superior to that of Infosys. Despite the one-off factors mentioned above, year-on-year revenue growth stood at 33.8% in dollar terms last quarter, and core earnings grew by 28.3%, again in dollar terms. Growth in rupee terms is lower thanks to the sharp year-on-year appreciation in the currency. But, with base set to adjust, rupee growth rates should converge with the dollar growth rates in the near future.
Note that even Infosys grew revenues by more than 32% last quarter; so it’s not that HCL’s growth rates are far superior. And, like Infosys, HCL, too, expects growth to come off sharply in the June quarter—its annual guidance implies revenues will grow by about 3% (HCL’s financial year ends in June). Yet, analysts expect the firm’s growth to be slightly higher than that of Infosys in FY09. Add to that the fact that valuations are relatively much cheaper, and it’s not surprising that a number of analysts are gung-ho about the stock.
Rising margin pressures for Zee Entertainment
Advertising revenues for Zee Entertainment Enterprises Ltd rose 33.4% in the March quarter, compared with the year-ago period, which, according to the company, is double the industry growth rate. That sparkling performance boosted the company’s consolidated revenues by 36.8%. Subscription revenue growth was a modest 12% year-over-year, but it’s better than the negative growth that the company saw in the December quarter. The revenue growth from domestic subscriptions was 15% more than in the December quarter, but rupee appreciation has taken some of the shine off the growth in international subscriptions. As a result, growth in subscription revenue for the full year was a lukewarm 10.2%.
Growth has been strongest in the “other sales and services” business (consisting of higher syndication sales of Ten Sports and revenues from the education business), admittedly from a very low base, and it accounted for 14% of revenues in the fourth quarter, compared with 4% a year ago.
Zee’s revenue growth has been based on steadily improving viewer ratings, enabling it come a close second to Star Plus among Hindi general entertainment channels, and analysts say that contracts with advertisers are increasingly signed on a quarterly basis, which monetizes the improvement in ratings.
Consolidated operating profits are up 36.9% in the fourth quarter. The company has launched Zee Next, a second general entertainment channel, to protect its flanks and that will involve substantial investment (analysts say it could be Rs200 crore in the next two years). The fourth quarter, however, has been exceptionally good, with the operating margin at 24.8%, exactly the same margin in the year-ago period.
But look at the trend in operating margins in FY08: 30.6% in Q1, 33.1% in Q2, 30.3% in Q3, and now 24.8% in Q4. With a host of new channels being launched in the general entertainment space, the pressure on margins will increase.
The question is whether the company will be able to increase revenues to offset margin pressures. One positive surprise could be a pick-up in direct-to-home revenues, which were Rs18.75 crore in Q4, up from Rs12.5 crore in Q2. But, a slowing economy and increased competition are likely to extract a higher price in future.
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