New Delhi/Mumbai: The highlight of HCLTechnologies Ltd’s quarterly numbers released on Wednesday was a negative free cash flow of $27 million (Rs119.61 crore) in the three months ended 30 September that comes in the wake of poor cash-flow conversion in fiscal 2010, according to analysts at a leading brokerage.

Ahmed Raza Khan/Mint

“This poor cash conversion raises questions on the quality of earnings growth," they said.

Sandip Gupta, vice-president (finance) at HCL, attributed the negative cash flow to capital expenditure incurred during the quarter and also one-time advances and payouts worth $43.8 million made towards buying out a client’s assets.

HCL posted a 2.5% decline in profits on revenue growth of 9% for the quarter ended 30 September compared with the preceding quarter, hurt by employee pay hikes and stepped-up hiring during the period.

Compared with the year-ago period, revenue, reported in dollars, rose 27.6% and profits, 7.9%.

Analysts were surprised by HCL’s announcement that while it returned earnings before tax of $103.7 million for the quarter, it only generated cash of $9.9 million through operating activities during the same period. Compared with a cash position of $100.6 million, at the beginning of the quarter, HCL’s cash and cash equivalents at the end of the quarter was $94.6million, implying a negative cash flow. HCL closed the quarter, considered by analysts to usually be the strongest for Indian IT services firms, with consolidated revenue of $803.8 million and net profit of $71.8 million.

On a standalone basis, HCL’s profits according to Indian accounting norms fell 35% to Rs194.9crore from Rs300.8 crore in the year-ago period. And standalone revenue grew 20% to Rs1498.3 crore from Rs1,247.3 crore in the year-ago period.

Shares of the company fell 3.1% on the Bombay Stock Exchange even as the sectoral index of IT stocks stayed flat with a marginal fall of 0.15%, while the Sensex fell 0.56% to close at 19,872.15.

The CLSA analysts’ concern on the quality of earnings growth is also reflected in the firm’s profitability. The company’s earnings before interest and taxes expressed as a proportion of revenue—a measure of profitability—fell from 18% a year ago to 12.9% in the September quarter.

But chief executive Vineet Nayar, who will also become vice-chairman from 1 November, claimed that margins would be back to 18% in April-June 2011. “We have invested in the infrastructure that we had to; productivity levels will also be higher, so the margins should be back at the last fiscal’s level."