Only in April, investors in HCL Technologies were worried about the company’s single-digit revenue growth, poor performance in the two large segments – financial services and manufacturing — and scratching their heads over why the large deal wins were not reflected in top-line growth.
But things stand changed now. In the September quarter, the company’s year-on-year growth in revenue stood at 12.8 per cent, up from 11.2 per cent in the June quarter and 8.1 per cent in the March quarter.
Sequential revenue growth in constant currency terms was 2.8 per cent. This is the highest among the large-cap IT companies, with the exception of Infosys.
The courage shown in maintaining its revenue guidance for the full year at 12-14 per cent is also remarkable, given that the industry is staring at a slowdown on slower IT spending in global markets. This shows the visibility the company has on the revenue front following deal wins.
The guidance number is without accounting for the revenue from Geometric, which will add up from the March 2017 quarter.
In the earnings call, C Vijaykumar, the company’s CEO, said he has “nothing to report” over signs of any weakness in the business on account of Brexit and said the deal pipeline is strong. The company reported winning 12 transformation deals during the quarter.
HCL Tech trades at about 14.5 times its estimated earnings for 2016-17, while Infosys and TCS trade at around 16-18 times.
The improved performance in the September quarter and strong revenue guidance can make the valuation gap narrow down.
What drives it?The performance over the last two quarters seems to have been driven largely by its infrastructure services segment.
This service line saw sequential revenue growth of 16.5 per cent in the June quarter, and 4.4 per cent growth in the September quarter — in constant currency terms.
The company’s acquisition of the external IT business of Sweden’s Volvo group and its deal for the group’s IT transformation in February has also helped. The acquisition added 40 new customers from the Nordic region and France.
The engineering and R&D services line recorded sequential growth of 2.3 per cent, reviving from 0.7 per cent in the previous quarter.
The company’s new acquisition — Butler America, a player in the engineering services niche in the defence space, may help growth in the segment in the coming quarters.
Among the verticals, revival in the financial services space has helped growth. The segment recorded growth of 5.6 per cent after a drop of 0.1 per cent in the June quarter.
The company’s management outlined that it was able to get a higher market share in this segment through use of automation platform-DryICE and digital solutions helping end-to-end digital transformation for clients.
The telecommunications segment also did well, recording 6 per cent sequential growth from a drop in revenue of 2.8 per cent in the previous quarter, riding an increase in spends by telecom companies on smart cities and content management through use of IoT and cloud computing.
The manufacturing segment was a disappointment, with a revenue drop of 0.9 per cent in the quarter, after 12 per cent growth in the June quarter.
Improved efficiencyHCL maintained its margin guidance at 19.5-20.5 per cent for the whole of 2016-17. In the September quarter, the company’s operating profit margin was 21.8 per cent, up from 20.72 per cent in the same quarter last year.
Margin improvement has been helped by the increase in fixed-price contracts.
Such contracts made up 61.3 per cent of revenue in the September quarter, up from 56.2 per cent in the same quarter last year.
The attrition rate increased to 18.6 per cent, from 17.8 per cent in the June quarter and 16.3 per cent in the same quarter last year. However, utilisation stood at 85.3 per cent, versus 83.6 per cent in the same period last year.