HCL’s revenue rises a bit, but salary hikes weigh on profit

HCL’s revenue rises a bit, but salary hikes weigh on profit

New Delhi: HCL Technologies Ltd, India’s fourth-largest software services company, said profit fell 2.7% in the first quarter from the preceding three months as the company raised salaries, even as the weakening of the Indian currency against the dollar improved realizations.

Revenue rose 8.2% to 4,651.3 crore from the preceding three months. Sales still lagged behind the 4,744.9 crore average estimate of eight analysts compiled by Bloomberg, dragging the company’s stock down by 8.6% on Tuesday. Analysts had expected HCL’s net profit at 487.4 crore.

Investors were disappointed by the moderate growth in revenue in a seasonally strong September quarter, analysts said.

HCL’s moderate revenue growth, coming after Tata Consultancy Services Ltd (TCS) missed analysts’ estimates, “will surely raise the bogey of demand flux for the entire Indian IT (information technology) space," analyst Nimish Joshi of CLSA said in his post-earnings note to clients.

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TCS, the nation’s largest software services company, on Monday said net profit gained 2.5% in the September quarter from the preceding three months, missing analysts’ estimates.

Demand for software services from the US and Europe, the two biggest markets for the Indian software industry, may decline because of slowing economies and a debt crisis. More than 70% of the revenue for the $76 billion Indian information technology industry still comes from these markets.

The macroeconomic indicators were “troublesome" and “there are concerns over the euro zone debt situation," said Vineet Nayar, chief executive of HCL Technologies. “Overall, IT budgets have been down for some time and the economic environment looks bleak. The activity is now around churn. Clients were unhappy and they are looking to change their vendors, which throws up more opportunities for companies like us."

Nayar, however, expects the quarter ending 31 December to be better for the company as a number of contracts are coming up for renewal, especially from Europe.

HCL Technologies hired 9,311 people in the September quarter, taking its total number of employees to 80,520, and signed 12 so-called transformational deals this quarter, including with EMI Group and Norfolk Southern.

Last week, Infosys Ltd had cut its US dollar revenue growth forecast for the current fiscal to 17.1%-19.1% from 18%-20%.

The information technology index on the Bombay Stock Exchange fell 3.7%, the most among all sectoral indices on Tuesday. Shares of TCS fell 7.7%, compared with a 1.6% drop in the exchange’s benchmark Sensex.

HCL’s stock performance relative to peers has been almost entirely driven by its superior revenue growth trajectory, Joshi said in the note.

“However, that phase of revenue outperformance clearly seems to be coming to an end," Joshi said. “Importantly, the revenue growth was traded for margins and HCL’s margins have now settled at a structurally lower level, much below peers even as revenue growth has mellowed."

The company’s operating margin narrowed 1.4 percentage points to 17.1% in the quarter ended September from the preceding three months.

In constant currency terms, HCL Technologies’ revenue from the US increased by 6.8% and Europe by 4.5%.

Retail and manufacturing were the fastest-growing segments for the company while financial services grew by 2.1% and telecom continued to bleed in constant currency terms. Nayar said that the company will watch the January month for client’s decisions on discretionary spending. Most of the revenue growth in September came from new clients and from “run-the-business" kind of work.

HCL’s board also approved a plan to pay an interim dividend of 4 a share, which includes a one-time “special milestone dividend of 2 per share for achieving its first billion-dollar revenue quarter.