HCL Tech shares show remarkable resilience
HCL Tech shares have declined by only 3.92% since 1 April, lower than the 5.1% drop in the CNX IT index
HCL Technologies Ltd has disappointed investors for the second quarter in succession. While its revenue growth was more or less in line with estimates, profit margins fell 122 basis points (bps) sequentially, compared with analyst estimates of an increase in margins of about 60 bps. The fact that this comes on the back of a higher-than-expected 250 bps drop in margins in the March quarter makes it even more disconcerting.
Despite the margin drop, HCL Tech shares have done well. HCL Tech shares have declined by only 3.92% since 1 April, lower than the 5.1% drop in the CNX IT index. Investors have shrugged off the huge gap between revenue and earnings growth.
While revenue has grown 3.1% over the past two quarters, earnings before interest and tax have declined by as much as 13%. On a year-on-year basis, dollar revenue grew 9.3% in the June quarter, but earnings fell 9.4%.
It’s not that investors are rewarding the company for superior revenue growth either. For instance, Tata Consultancy Services Ltd (TCS) revenue also grew by 9.3% last quarter, while profit grew 9.1%.
Margins dropped mainly because of the investments the company is making such as setting up global delivery centres, hiring senior personnel and so on, said Anil Chanana, HCL’s chief financial officer.
The company’s selling, general and administrative expenses rose 70 basis points in the June quarter. Another 60 basis points hit came from visa fees, which is a one-off factors, Chanana said.
After the sharp 250 bps drop in margins in the March quarter, analysts had estimated that the company would bounce back, thanks to depreciation in the rupee and a reversion to mean as far as investments go.
Clearly, that has not happened. While the company said that its full-year margins would be in the 21-22% range, things won’t be easy. Wage hikes would add to pressure on margins in the September and December quarters.
If the June quarter margin levels of 20% are the new normal, investors should prepare for a stormy ride as far as returns go.
The writer does not own shares in the above-mentioned companies.
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