The March quarter earnings performance of IT services provider HCL Technologies Ltd was hardly exciting.
Marred by one-off items, its operating margin took a sharper-than-expected hit. For the quarter, Ebit margin declined 630 basis points (bps) sequentially to 16.6%. Ebit is short for earnings before interest and tax. One basis point is one-hundredth of a percentage point.
Margins were seen getting impacted by the one-time special bonus of ₹728 crore offered to employees, salary hikes and seasonality in its products and platforms segment. But analysts point out that margin contraction is 230bps higher than consensus estimates.
Sequential revenue growth in constant currency terms at 2.5% was marginally below the 3% estimate many analysts had pencilled in. Organic revenue growth in constant currency terms was 1.5% on a quarter-on-quarter basis.
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HCL Tech has lagged some of its tier-1 competitors on this parameter in the March quarter. For instance, Tata Consultancy Services Ltd (TCS) and Wipro Ltd saw a sequential constant currency revenue growth of 4.2% and 3% in the March quarter. HCL Tech’s Q4 revenue growth was impacted by weakness in its aerospace and manufacturing verticals, which according to the management has bottomed out and should improve in the coming quarters.
Further, in a post-earnings media conference call, the management also clarified that its March quarter net profit decline was on the back of a one-time increase in tax outgo as per new tax laws effective 1 April 2020.
Going ahead, HCL Tech eyes double-digit revenue growth for FY22. Usually, the company assigns a numerical value to its revenue guidance, but this time, it refrained from doing so. According to analysts, this revenue guidance implies at least a 2% compounded quarterly growth rate over Q1-Q4. As for margins, the company expects them to be in the 19-21% range, after factoring in salary hikes, normalization of travel costs and planned investments in leadership augmentation, among others.
But analysts broadly expected this guidance. What investors can seek solace from is the company’s strong deal wins, which augurs well for revenue growth. HCL has signed 19 new large deals across verticals, including financial services, consumer goods and manufacturing. Its new deal total contract value (TCV) was at an all-time high of $3.1 billion, an increase of 49% on a year-on-year basis for Q4.
For FY21, TCV improved by 18% compared to the last fiscal year. The company’s management said that most of its deals were with Fortune 500 companies and one of the largest deals was with a global technology company as a preferred partner. The management said that its all-time high deal pipeline gives it confidence going into the new fiscal year.
HCL’s total headcount in the March quarter stood at 168,977 with a net addition of 9,295 during the quarter, the management said. The company plans to hire 15,000 entry-level employees across geographies. Attrition at 9.9% was down 640bps on a y-o-y basis, indicating that measures to retain talent yielded results. The management said that it will continue to take steps to keep attrition under control.
Meanwhile, Bloomberg data shows that the HCL Tech stock is trading at a one-year forward price-to-earnings multiple of 16 times, much lower than TCS and Infosys, which are trading at multiples of 27 times and 23 times, respectively. Analysts expect the valuation gap to persist until revenue growth picks up significantly.
