HCL Tech sees infra driving future growth, profit trumps estimates

Bangalore: HCL Technologies Ltd, India’s fourth-largest software exporter, reported a 43% increase in first-quarter profit led by its infrastructure management business that chief executive Anant Gupta said will continue fuelling growth, which some analysts say is a worry because of the over-reliance on this one segment.

Profits were driven mainly by healthy spending from top clients, as India’s fourth-largest software exporter continued the strong growth momentum shown by bigger rivals Tata Consultancy Services Ltd (TCS) and Infosys Ltd.

“If you look at the infrastructure outsourcing space, it is relatively new and under-penetrated. So, obviously we’ll continue to drive growth over there,” said CEO Gupta in a post-earnings conference call with reporters.

HCL Tech added that it continued to see strong demand from clients in the US and Europe. The company said it is also currently consolidating several of its campuses across the country, creating 31,000 new seats in the process.

“Revenue growth was once again led by infra services,” said analyst Nimish Joshi of CLSA India in a post-earnings note to clients. “While a section of the Street might worry about the infra services-led growth yet again, we are not as concerned. Much of the deal flow in the market is happening in this space and we do not expect any immediate fatigue on growth in this area. We think there is still a 9-12 month runway for infra services to continue driving HCL’s overall growth.”

For the September quarter, HCL Tech posted a net profit of $226 million compared with $158 million a year earlier. Revenue rose 14% to $1.27 billion. Analysts, on average, had expected net profit of $217.1 million on a revenue of about $1.27 million, according to estimates compiled by Bloomberg. HCL follows a July-June reporting calendar.

In rupee terms, net profit rose 64% to Rs.1,416 crore on a revenue of Rs.7,961 crore, which was 31% higher over last year. Export-dependent Indian firms have benefited from the rupee’s depreciation this year.

During the quarter, the company added one $100-million client. HCL said it also booked about $1 billion of contracts, which included nine transformational deals.

Experts tracking the sector said the company needs to reduce its over-reliance on its infrastructure outsourcing business, despite the strong results, and strengthen its other businesses.

“Infrastructure management continues to dominate revenue growth and that hasn’t been addressed in this quarter,” said an analyst at a foreign brokerage who did not want to be named.

Revenue from infrastructure management, which contributes one-third of the company’s overall sales, grew by 42% from last year.

“This was an in-line quarter from HCL on the topline (revenue), which is a bit of a disappointment given that we have seen both Infosys and TCS beating dollar growth expectations. Further, growth remains polarized towards Infrastructure services,” said Rumit Dugar of Religare in a note.

HCL Tech’s high utilization number of close to 80% is also an area of concern and the company needs to hire more freshers to balance out the ratio, experts said.

The company also said it would pay shareholders an interim dividend of Rs.2 per share. Total headcount for the quarter stood at 87,196, with net addition of 1,691 employees.

The September quarter is traditionally a strong one for Indian software service providers, with most big-ticket client deals getting signed and budgets coming through during the period.

In a 10 October report, outsourcing advisory firm Information Services Group estimated that top multinationals and Indian technology firms such as International Business Machines Corp., Accenture Plc., TCS and Infosys signed deals worth nearly $6 billion globally during the September quarter—which would be the highest combined deal value ever for a single quarter.

For India’s $108-billion information technology (IT) sector, which witnessed its slowest year of growth in 2012-13 since the 2008 global economic meltdown, the robust performances of TCS, Infosys and HCL Tech dispels investors’ concern of slowing growth in a rapidly maturing and commoditized market.

On Tuesday, TCS further strengthened its top position in the Indian IT industry, posting 17% revenue growth, while No.2-placed Infosys also posted its strongest revenue growth in nearly two years.

Over the past two years, TCS and US-based Cognizant Technology Solutions Corp. have set the benchmark for the sector, grabbing market share away from former IT sector stars Infosys and Wipro Ltd, who during the same period faced a decline in their fortunes that eventually prompted massive organizational overhauls at both Bangalore-based firms.

Both Infosys and Wipro have lagged HCL Tech during the same period, with the Noida-based firm gaining market share by aggressively winning deals in the computer infrastructure management space.

With its latest performance, HCL Tech also further narrowed its gap with slightly larger rival Wipro—it has now grown quarterly revenues faster than Wipro for more than two years. Wipro will report second-quarter results on 22 October.

Shares of HCL Tech ended down 6.66% at Rs.1,083.15 apiece on BSE despite the strong results due to profit-booking by traders.

 

RANJAY KUMAR

PGDM 1st year