Share of HCL Technologies Ltd has continued to outperform the NSE CNX IT Index ever since the rupee started appreciating in mid-March this year. One of the reasons for this was the large foreign exchange (forex) hedges held by the company. The other was an increase in the company’s growth rates. In the year till June, revenues grew by 42.4% in dollar terms—much higher than the 28% growth recorded in the previous fiscal. Revenues in dollar terms grew by 42.8% in the September quarter as well, indicating that growth continues to be strong.
But rupee-based growth on a sequential basis, numbers that the markets are likely to focus on, were less spectacular.
Adjusted for gains from hedging, revenues grew by just 5.7% sequentially to Rs1,703.2 crore—lower than the average growth of more than 8% reported by Tata Consultancy Services Ltd and Infosys Technologies Ltd. It must be noted, however, that HCL reports rupee-based numbers based on quarter-end exchange rates, unlike TCS and Infosys, which use average realized rates during the quarter.
The appreciation in the rupee has been sharper based on quarter-end rates, compared with that based on average rates during the quarter. Hence, HCL’s rupee-based results are more depressed compared with its peers. The company’s volume growth of 8.1% compares well with peers though.
Growth in core profit also wasn’t impressive at 4%. But again, HCL gave salary increases only last quarter, which hit margins by 172 basis points.
One of the worries for analysts could be the fact that the company’s second largest client in the business process outsourcing (BPO) space is gradually moving out. It accounted for 13% of revenues last fiscal, but has dropped to less than 5% in the past two quarters. This is the reason growth in the BPO segment has been flat in the last two quarters. Growth will continue to be muted as the client gets completely phased out in the December quarter. Another worry is the jump in debtors and the consequent drop in free cash flow (adjusted for capital expenditure) to just $4 million (Rs15.72 crore) last quarter, from as high as $83 million in the June quarter.
On the whole, the results were a mixed bag. The growth story remains intact, reinforced by the company’s record employee additions last quarter. In addition, revenue per employee has increased substantially year-on-year due to a change in business mix and a rise in average billing rates.
Ever since it reported a sharp drop in profit in the June quarter and lowered its growth target for the year, Sasken Communication Technologies Ltd has consistently underperformed its peers (read NSE’s CNX IT Index). Since then, the stock has underperformed the CNX IT Index by nearly 30%.
After the company announced a 137.6% sequential jump in operating profit for the September quarter, the stock got a fresh lease of life, rising by 5.4%. But the joy was short-lived. After the company disclosed in its analysts’ call that the September quarter profit included a one-off compensation of Rs10.5 crore, the stock was back to its underperforming ways. Sasken shares corrected by over 3.1% on Tuesday—double the rate at which the CNX IT Index fell.
Adjusted for the one-time compensation, operating profit rose just 31.3% over the June quarter’s low base. Core earnings before tax and non-operating income amounted to Rs1.6 crore or just 1.2% of revenues.
Although it was better than the loss of Rs1.5 crore in the June quarter, the low profit margin wasn’t enough to impress analysts.
What’s more, much of the margin increase was because of a jump in licence revenues of the company’s products business. The losses incurred by the products business, therefore, halved from more than 46% of revenues in the June quarter to 23% last quarter. Research and development expenses fell sharply last quarter.
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