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Business News/ Market / Mark-to-market/  HCL Tech revenue warning should curb irrational expectations
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HCL Tech revenue warning should curb irrational expectations

HCL Tech's investors have been dealt a double blow, with both revenue and profit likely to be materially below expectations

HCL Tech’s second revenue and profit warning in three quarters should help bring a sense of balance. Photo: Pradeep Gaur/MintPremium
HCL Tech’s second revenue and profit warning in three quarters should help bring a sense of balance. Photo: Pradeep Gaur/Mint

Investors in HCL Technologies Ltd had it coming. The company had disappointed investors for two quarters in succession, but its shares have remained remarkably resilient. See https://mintne.ws/1SUtgRk.

Now, HCL Tech’s second revenue and profit warning in three quarters should help bring a sense of balance. The company said in a pre-quarter earnings note that revenue growth is likely to be tepid in the September quarter.

According to an analyst with a multinational brokerage firm, tepid could mean anything, and the uncertainty will weigh on the company’s shares. Besides, HCL Tech said it will set aside $20 million on account of certain differences that have arisen with a client. It looks as if the customer has invoked a liability clause that is part of some IT services contracts, the analyst said. Another related pain point is that it has lost this client.

As such, HCL Tech’s investors have been dealt a double blow, with both revenue and profit likely to be materially below expectations. The sum of $20 million amounts to 1.3% of the company’s quarterly revenues, which means profit margins will be way below estimates for the third successive quarter. The company might term this as a one-off expenditure, but these are the risks that are normally associated with the business, and should be considered as recurring costs.

Analysts at Nomura Research said in a 29 September note to clients that it expects HCL Tech’s revenues to grow by 3.3% in constant currency terms. According to the analyst mentioned earlier, 3-3.5% growth was what most experts would have estimated before the company’s warning was issued. With the company now saying growth will be tepid, constant currency growth could be as low as 0.5-1%.

HCL Tech’s profit margins have been under enormous pressure in the past two quarters, so much so that while revenues grew by 9.3% year-on-year in the June quarter, operating profit fell by 9.4%. Also, margins fell to 20.2% last quarter, below the company’s guided range of 21-22%.

The fact that the company’s shares were still firm suggests investors were pricing in a bounce-back. Instead, they have got a revenue warning. Worse, this comes at a time when macro indicators in the US point to decelerating IT spending.

The writer does not own shares in the above-mentioned companies.

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Published: 30 Sep 2015, 07:51 PM IST
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