25037
First Published: Thu, Oct 17 2013. 03 31 PM IST
Home»  Money

Why HCL Tech, TCS shares fell

Because investors are not unhappy that revenues are in line with expectations. They wanted them to exceed expectations
Why HCL Tech, TCS shares fell
In the case of HCL Technologies, some analysts are also worried about the fact that growth continues to be driven by just one service line—infrastructure services. Photo: Ramesh Pathania/Mint
Results of information technology (IT) services companies have been great; but they evidently haven’t been good enough. Shares of HCL Technologies Ltd and Tata Consultancy Services Ltd (TCS) fell by 7.09% and 5.25%, respectively on Thursday, despite reporting higher-than-expected profits for the September quarter.
This is because earnings were boosted by unexpectedly high margins. Investors are disappointed that these companies didn’t surpass Street estimates on the revenue growth front. After Infosys Ltd reported a surprise 3.8% growth in dollar revenues, against expectations of 2-2.5% growth, investors started assuming that better-performing companies such as TCS and HCL Tech would also beat Street expectations of revenue growth by a handsome margin. But this was not to be. TCS reported a 5.4% increase in dollar revenues, marginally higher than Street expectations, and HCL Tech reported a growth of 3.5%, more or less in line with consensus estimates.
Meanwhile, valuations had risen to as high as 24 times estimated financial year 2013-14 earnings in the case of TCS. The fact that revenues didn’t exceed expectations has provided a much-needed check on valuations of IT stocks.
In the case of HCL Tech, some analysts are also worried about the fact that growth continues to be driven by just one service line—infrastructure services. This segment grew by 8.7%, while growth in other service lines ranged between 0.6% and 1.9%. According to an analyst with a multi-national brokerage, given the under-penetration of Indian IT service providers in this segment, the growth opportunity will remain immense in the coming years. Even so, the dependence on one service line is disconcerting. HCL Tech’s chief financial officer Anil Chanana says that the infrastructure services business provides steady annuity revenue, and adds that the company has won good deals in the enterprise application services space as well.
HCL Tech reported a surprise 280 basis points jump in operating profit margin, pocketing most of the gains from the rupee’s deprecation, despite absorbing some salary hikes last quarter. In the process, for the first time ever, the company’s margins surpassed those of Infosys.
HCL Tech’s employee utilization rates are at record levels and it has yet to see the full impact of wage increases. Thus, the trend in margins is expected to reverse. Besides, as pointed earlier, investors are in no mood to reward earnings surprises driven by margin increases. HCL Tech’s revenue grew by only 14.1% year-on-year, providing no reason for analysts to raise revenue growth expectations.
HCL Tech’s valuations had risen to around 15.5 times estimated FY14 earnings just before its results announcement, and have now corrected to less than 14 times, thanks to the drop in the stock on Thursday and adjusting for earnings upgrades post the results. As analysts at CLSA Research point out in a note to clients, “HCL’s stock performance has been entirely earnings-led. HCL’s price-to-earnings has been capped by fears around concentration of growth in infrastructure services and potential disruption post change in the top management. We believe infra-led growth has legs even as consistent financial performance will assuage concerns around Vineet Nayar’s exit. As Street overcome fears around these, some re-rating is likely.”
Comment E-mail Print   0
First Published: Thu, Oct 17 2013. 03 31 PM IST
More Topics: HCL | TCS | Infosys | IT earnings | shares |
blog comments powered by Disqus
  • Wed, Apr 16 2014. 06 11 PM
  • Wed, Apr 09 2014. 05 19 PM
ALSO READclose

Google buys solar-powered drone maker Titan Aerospace

Subscribe |  Contact Us  |  mint Code  |  Privacy policy  |  Terms of Use  |  Advertising  |  Mint Apps  |  About HT Media  |  Jobs
Contact Us
Copyright © 2014 HT Media All Rights Reserved