COMMENT. HCL Tech beats rivals, but next two quarters are critical

HCL Technologies has beaten larger rivals- Wipro, Infosys as well as TCS on the revenue front, thanks to a weak base. It reported a sequential 2.1 per cent growth in revenue in constant currency terms in the December 2015 quarter (versus 1.2 per cent in the September 2015 quarter), meeting most analyst estimates.

Improved traction in infrastructure services (3.4 per cent growth vs. 0.9 per cent in previous quarter), that accounts for over a third of the revenue helped. The recovery in US sales growth — at 5.5 per cent in constant currency terms versus 0.7 per cent in the previous quarter was also a positive. TCS, Infosys and Wipro recorded negative to marginal growth in America, as they had a strong September quarter.

However, the company’s two large verticals — financial services (27 per cent of revenue) and manufacturing (33 per cent of revenue) — were weak. While the former recorded a 1.9 per cent sequential growth, the manufacturing vertical saw revenue decline 1.3 per cent. With the US manufacturing sector contracting in recent months with increasing pressure from a strong dollar and clients tightening their purse strings, IT service exporters have been feeling the heat.

Operating margin was at 21.5 per cent, up 80 basis points, sequentially. Despite higher costs following one-off expenses due to Chennai floods in the quarter and increasing competition pressure, the company’s improved margins are a good signal.

HCL Technologies added one new client in the $50 million plus bucket and two clients in the $40 million plus bucket. Revenue from top five clients was unchanged at 13.6 per cent of overall revenues.

Attrition, though, was marginally higher at 16.7 per cent for the quarter, utilisation improved to 84.7 per cent versus 83.6 per cent in the September 2015 quarter.

The company has indicated a stronger growth in the next six months (its financial year is July-to-June). In IMS especially, there is a good line-up of deals that could buttress overall revenue growth in the coming quarters. Of the 10 large deals, two were completed in the December quarter and others are expected to be concluded soon. Revenue growth, on a y-o-y basis in constant currency has dropped from 16.2 per cent in the December 2014 quarter to 9.3 per cent in the December 2015 quarter.

The company has been indicating good deal wins over the last year, but, that has not reflected in revenues. In the coming two quarters, if growth doesn’t revert to double-digits, market concerns will increase.

On margins, the company has guided for 21-22 per cent levels on EBIT in the second half of the year. In the recent quarter, the EBIT margin was 20 per cent, up from September 2015 quarter’s 19.4 per cent.