HCL Tech: few takers for 7.6% dividend yield

HCL Tech: few takers for 7.6% dividend yield

Software services firm HCL Technologies Ltd’s shares fell just 0.7% on Thursday, much lower than the 4.6% drop in the CNX IT index. But that has nothing to do with its September results announced on Wednesday evening, because the results were disappointing. The reason the company’s shares didn’t fall much was simply that it had already fallen to such lows that buyers can now expect a dividend yield of as high as 7.6% on them.

HCL Technologies has told investors that it would pay a quarterly dividend of Rs3 per share, and its commitment to this was evident when it decided to take on debt to acquire Axon Group Plc. instead of using the cash on its books. Note that the 7.6% yield is tax free, and is rather high even in the current interest rate regime.

But even with such an attractive yield, investors are shying away from the counter. The firm’s valuation took a major hit when it decided to acquire Axon for a premium valuation. Axon is about a fifth of HCL Technologies’ size and any missteps could hurt overall performance in the future.

The September quarter results threw up new worries. Revenue growth in constant currency terms was just 2.4% on a sequential basis, of which more than half was contributed by acquisitions. Organic growth was just 1%, which is a sharp fall for a company that was growing at a higher-than-industry rate till the last quarter. The chart alongside shows how year-on-year growth rates have fallen sharply in the past few quarters.

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On the margins front, investors were negatively surprised by a near 10 percentage points drop in the margins of the BPO (business process outsourcing) business, which accounts for more than 11% of overall revenues. Earnings before interest and tax of this division fell by 41% on a sequential basis. Margins were hurt mainly owing to new acquisitions. Overall margins fell by about 100 basis points and operating profit by about 5% quarter-on-quarter, in dollar terms.

The markets are also concerned about HCL Tech’s huge hedge position of $1.9 billion (Rs9,291 crore). If these hedges are held till maturity, the currency rate the company would be able to realize will be much lower than the ruling rate of about 49 to the dollar, since most of these contracts were booked when the rupee was at 40. But the bigger worry is that the company may choose to square off some of these trades, like it did in the June quarter. That would result in cash losses and would hurt investor sentiment. It’s because of these multiple worries that investors are willing to let go of the high tax-free dividend yield on offer.

And of course, who knows if the company will be able to maintain the current rate of dividend payout if the slowdown gets worse.

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