Computer services provider HCL Technologies Ltd has reported the best operating results among big IT firms, with revenues growing by as much as 11.5% sequentially and earnings before interest and taxes (Ebit), rising 19.3%.
(HEDGING BACKFIRES) The company has been focusing on delinking growth in revenues and profit from that of employees. One way it has done that is by increasing the proportion of fixed-price contracts—35% of revenues in the June quarter versus 30% in the same three months a year ago. Further, it has been aggressive in deploying freshers into projects, reducing the need for more expensive lateral hires. As a result, employee utilization has inched up and margins have improved.
HCL’s annual growth in revenues has been among the highest in the top-tier IT space for some time now. It has also been able to improve margins steadily; Ebit margins have increased by more than 200 basis points to 19.5%. This has resulted in a 52.2% rise in core earnings.
The company has also been paying hefty dividends. In the June quarter, it stepped up the payout by 1.5 times to Rs3 per share per quarter. This translates into a dividend yield of 5.8% in a year, high for a firm that’s growing earnings steadily.
One may wonder why HCL Technologies’ shares are trading low. The main reason is the company’s aggressive hedging policy, which has backfired because the rupee has fallen sharply.
The company will continue to have some foreign exchange losses if the rupee remains at current levels, and so its gains from the depreciation in the rupee are limited compared with other firms in the sector. But the majority of the impact has been taken in the June quarter and things should be better going forward, especially since the rupee has risen about 2% from end-June levels.
The shares have underperformed substantially owing to the large foreign exchange losses, but now with the firm increasing dividend payout, and yields rising from around 4% to 6%, investors are likely to rush to the stock when markets open on Monday.
Hero Honda Motors: lone ranger amid falling automobile stocks
Motorcycle maker Hero Honda Motors Ltd is the only major Indian automobile firm to report gains in operating margins for the quarter to June, compared with the same period last year. The company has been outperforming the industry in profit growth and most analysts were expecting it.
Compared with the March quarter, however, margins have reduced by 277 basis points, indicating the firm is not immune to input-cost pressures. Raw material expenses rose by 130 basis points as a percentage of sales over the June quarter last fiscal year because of an increase in the prices of a number of commodities towards the end of March. A basis point is 0.01 percentage point.
But for the government’s intervention to stop steel price increases in April, margins would have been worse in the June quarter. On the other hand, the quarter’s results included exceptionally high advertising expenses on account of the Indian Premier League cricket tournament. This impacted margins by 120 basis points.
Still, thanks to a relatively low base last year, and better economies of scale and price increases, Hero Honda’s operating profit has risen by nearly 30%, on the back of a 16% increase in revenues. Operating profit per vehicle sold has increased by 16%. Profit after tax rose at an even higher rate of 44%, thanks a lower tax provision. The company’s new plant in Uttarakhand, which enjoys tax incentives, has started production, and this has led to the reduced tax liability.
At a time when large auto companies have reported declining profits, Hero Honda’s investors have the luxury of seeing their company’s profit rise. It’s no wonder that the stock rose 6.4% after results were announced.
At about 15 times past earnings, the firm is the most expensive stock in the sector, which seems fine because it’s earnings growth is far higher than other auto firms.
But it leaves little room for a upside. Once the base catches up in the next two quarters, earnings growth will stop being so high. Also, the steady increase in interest rates is just making things worse for two-wheeler demand. With steel prices set to increase further, the outlook isn’t very bright.
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