HCL Technologies numbers stable; performance not as bad as first look

HCL Technologies missed analysts’ profit expectations for the June 2015 quarter and reported lower margins. While the stock was hammered after the results, — it fell 5.9 per cent on Monday — a closer look at its performance reveals that the country’s fourth largest software exporter delivered a rather stable set of numbers.

Its dollar-denominated revenue grew by 3.2 per cent versus the previous quarter — closer to the 3.5 per cent growth reported by TCS, the largest peer, and much higher than 1.1 per cent rise reported by Wipro, the third largest. Among the top four, only Infosys reported a much stronger 4.5 per cent increase in the dollar revenue.

What may stoke some worries among investors is the sharp fall in the operating profitability over the past two quarters. HCL Tech’s margin at earnings before interest and tax (EBIT) fell to 20.2 per cent from 21.3 per cent in the March quarter.A prominent reason for the shrinking margin is that its exposure to onshore staff has increased. Margin is lesser for onshoring than offshoring.

“Over the past few quarters, we have been focusing on creating the delivery capabilities closer to the client (near shoring). This sometimes includes acquiring employees of the client,” said Anil Chanana, CFO, HCL Technologies. He said that out of the total net addition of 14,416 employees in FY15, nearly 2,900 were added onshore by acquiring clients’ staff.

These are investments for the future to make the project execution smooth during the initial phase, says Chanana. He is confident to retain the margin around 21-22 per cent.