COMMENT. HCL slips behind peers on key financials

If a mild deviation from estimates led to a sharp fall in the TCS stock, a relatively ‘weak’ performance from HCL Technologies (HCL) in the September quarter meant that its shares were docked 9 per cent on Friday.

In a deviation from its normally ‘market beating’ performance over the past several quarters, HCL saw key financials improve at a slow pace in a seasonally strong quarter, heavily underperforming TCS and significantly falling behind Infosys during this period.

During the September quarter, HCL’s revenues grew 1.9 per cent sequentially in dollar terms, while net profits rose marginally by 0.6 per cent. Infosys and TCS had revenue growth of 3.1-6.4 per cent and net profit increase in the range of 3.2-6 per cent. Apart from significantly underperforming peers in a seasonally strong quarter, HCL also reported a decline in utilisation levels (82.7 per cent), when peers managed to drive this factor up to higher levels.

Clearly, HCL has witnessed significantly lower traction compared with TCS and Infosys during the first quarter. The firm follows July-June as the fiscal year.

HCL’s key infrastructure services offering, which has been a strong revenue driver grew at just about the company’s revenue rate in the September period.

Financial services grew marginally during the quarter, while life sciences, public services and telecom witnessed fall in revenues.

For TCS and Infosys, the growth across segments was more broad-based. On the positive side, manufacturing and retail grew at a healthy pace of 4.4 per cent and 14.3 per cent, respectively. Its enterprise system integration offering expanded at a healthy pace suggesting that HCL has been able to tap discretionary spends of clients.

Large-size customer addition too was not as strong as peers with the company managing on increase in the $100-million band and a couple in the $40-million category. Infosys and TCS had 7-10 additions in the larger buckets.

Overall, the numbers were disappointing for HCL, while peers made the most of a quarter that tends to be robust for IT players.

t remains to be seen if these results are just a blip in an otherwise strong growth trajectory.

Of course, the December quarter tends to be tepid for IT players given the weak volumes due to a greater number of holidays as well as it being the start of the next budgeting cycle for clients. So the challenge would be significant for HCL to regain momentum. It would need to really score well in the remainder of the year to meet the upper end of the projected growth rate for the industry at 13-14 per cent. Going by the results thus far, only TCS looks all set to exceed that figure convincingly. HCL is thus likely to trade at significantly lower valuation multiples compared TCS and at a discount to Infosys as well.

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