HCL Technologies Ltd’s March quarter numbers have revived faith in the technology sector. Information technology (IT) stocks were bruised and battered after Infosys Technologies Ltd, long considered the sector bellwether, disappointed with its fourth quarter numbers and dashed hopes with its earnings per share guidance. But that has changed.
Also See | Logging gains (PDF)
On Wednesday, HCL reported a 4.8% increase in its revenue in constant currency terms from a quarter ago. Earnings before interest and tax (Ebit) grew 16.2% sequentially in dollar terms. These numbers certainly look rosy compared with the 1.1% growth in revenue Infosys reported. No wonder, HCL’s stock gained 10% after the results were announced, while the CNX IT Index of the National Stock Exchange rose 2.2%.
HCL’s numbers not only beat Street estimates, but also help the company remove the bugbear about it not being able to grow revenue and margins at the same time. For the three months ended March, HCL reported Ebit margins of 14.4%. This is 1.3 percentage points more than that in the December quarter, but still 1.8 percentage points less than the Ebit margin for the previous March quarter.
The company has also increased its employee utilization ratio, improved its operating cash conversion ratio and took fewer days to collect its account receivables, thus answering critics in the process. It has also restrained its selling, general and administrative expenses, which helped add to earnings.
The key question for investors, of course, is whether the company will be able to sustain its margins?
While both onsite and offshore realizations have increased in constant currency terms, all the gains were driven by volume growth. Now, while sequential revenue growth came in at 5.8%, this metric has come down steadily over the last four quarters. That is a cause for concern; though the caveat must be added that HCL’s compounded quarterly growth rate of 7.5% significantly beats the industry average.
Also, sequential revenue growth in the US, HCL’s largest market, dipped to 0.7%, though that could be a function of seasonality as well.
A sanguine company management guides for a percentage point increase in Ebit margins in the next quarter. But, the seasonality of wage hikes means that HCL could face some margin pressure in the quarter after that. That, too, could be allayed if the BPO (business process outsourcing) business comes on track and the utilization level improves.
For now, these factors seemed to be priced in the stock. After Wednesday’s spurt, the scrip trades at 16.6 times its estimated earnings for fiscal 2012, the same as its five-year median. Further upside depends on positive margin surprises.
We welcome your comments at email@example.com