The law of large numbers hits HCL Tech
Higher incremental revenues resulted in a lower growth of 2.8% in June
The law of large numbers is coming into play at HCL Technologies Ltd. The sequential revenue growth rate in constant currency terms has decreased steadily over the past year. In 2013-14 sequential addition to quarterly revenues averaged $44 million compared with $37 million a year ago. But while a $37 million rise in incremental revenues in June 2013 meant a growth of 3.9%, higher incremental revenues resulted in a lower growth of 2.8% in June 2014.
To arrest the falling growth tempo, the company is signing more deals. It booked more than $5 billion worth of contracts in the last fiscal year. But as deal sizes become larger and more complex, it is taking time to execute them. Depending on the clients, transition times (the lag between planning and execution of a contract, which results in billing) for some contracts are as high as one year, said Anil Chanana, chief financial officer of HCL Technologies.
Still, with three large deals estimated to be in the later end of the transition phase now, execution will gather pace. Revenue growth at business verticals such as application services (that slowed from 2.9% in March to 0.8% in constant currency) is expected to improve.
The company is confident of doing better than the year gone by, when revenues increased 14%. An improving market gives HCL Tech the leeway to selectively bid for contracts, the management said in a conference call. Growth is expected to be driven by Europe where the company continues to see significant business opportunities.
Even though the US is lagging, the order pipeline is better in the region than what it was in the year-ago period. To improve deal wins, it is investing more in sales. In recent times, it has curbed its selling and general administration expenses growth to maintain margins. Ebitda margin in the June quarter was 26.3%, about 40 basis points lower sequentially, though that was primarily owing to currency fluctuations. One basis point is one-hundredth of a percentage point.
But the changing nature of the business—in terms of the nature and size of the deals—means revenues from some contracts can be lumpy or delayed on a quarterly basis. That is one reason why the company’s dollar revenue growth of 3.4% lagged some analysts’ estimates, leading to a sell-off in the stock on Thursday. Note that the rally in the past year when the stock gained 70% may also be leading to some profit booking. It is time that investors temper their growth rate expectations, at least until that the company demonstrates that it has mastered the transition cycle.
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