Stock Review: HCL TECHNOLOGIES

HCL Technologies continued to show a sustained momentum across most of its business verticals in the June 2011 quarter. While its management expects win a few large-scale deals in the coming quarter, it has also cited caution over the latest macroeconomic uncertainties in the US and Europe. The company also expects to take a hit in profitability on account of wage hikes.

Over the past four quarters, the country's fourth-largest listed IT exporter has shown acceleration in its revenue generation. An analysis of its annual revenue growth in trailing 12 months in each of the past five quarters reveals that the rate of growth has escalated to 27.6% in the June 2011 quarter from 18.6% a year ago.

The current growth rate is close on the heels of a 28.6% revenue growth reported by TCS, the country's largest IT exporter, in 12 months to June 2011. Though this is true, it needs to be noted that TCS has reported this revenue growth at a much higher margin of 27.5%. For HCL Tech, it stands half way at 14%.

HCL Tech has historically operated at a lower operating margin, which can partly be attributed to the lower component of off shoring in its revenue and its loss-making BPO operations. But the company has taken steps to improve profitability.

To start with, its BPO division is currently under restructuring phase and would take another two-three quarter for a turnaround. The company has also improved its sales receivables function; the number of days it takes to collect outstanding sales has reduced to 54 days from 67 days three years ago.

The company has settled its loss-making forex hedging positions, which ended the series of large forex losses in the past few quarters. These measures have resulted in improving the overall cash flow conversion. HCL Tech converted 100% of its net profit into operating cash in the June quarter; the proportion was just over 14% a year ago.

In the near term, HCL Tech's management has spelled caution with lower expectation of an uptick in billing rates. Also, though its operating margin before depreciation improved by 120 basis points, CFO Anil Chanana has hinted at a 300-bp drop for the September 2011 quarter due to salary increase. He maintains the margin target at 14% for FY12.