HCL Tech beats peers, forecasts highest growth for FY18

HCL Technologies, the country's fourth largest information technology (IT) services entity, surprised the Street with a high growth forecast for this financial year, at a time when larger peers have been conservative.     

Noida-based HCL says it expects revenue growth of 10.5 to 12.5% in constant currency for 2017-18. Larger peers Infosys, Cognizant and Wipro have given a single-digit or flat growth estimate, due to global uncertainties and anticipated cost pressure with a push for local hiring in the US. Industry body Nasscom has delayed its growth forecast for FY18 by a quarter, citing uncertainties.

Indian IT services entities also see a challenging time ahead, with the decline in traditional technology and increasing client demand for services through digital technology such as cloud. 

HCL, however, says it is not perturbed by the sectoral and global headwinds. “We have been investing in the US market over many years and our visa dependence is very low. Also, about 55% of our workforce in the US are locals and we are not worried,” said C Vijayakumar, president and chief executive. 

Sector analysts say HCL’s strong growth forecast is largely fuelled by “significant inorganic contribution”. “We expect the inorganic business contribution through acquisitions of an US-based engineering service provider and Geometric to boost HCL’s growth this year. The engineering services market is growing faster than traditional IT services,” said Pareekh Jain, analyst at HfS Research India.  

The company reported nearly 21% growth in net profit to Rs 2,325 crore for the quarter ending March 31. Revenue grew by 20% to Rs 12,053 crore. During the corresponding period last year, net profit was Rs 1,926 crore, on revenue of Rs 10,698 crore. 

In the quarter, the operating margin (earnings before interest and taxes or Ebit) was 20%. HCL saw a sharp rise in its digital technology business and platform-based services. 

“Our Mode 2 and 3 services, which focus on new growth areas like digital, cloud, security and IoT, as well as products and platforms, registered a very impressive 30.9% growth in FY17. Our differentiated employee engagement practices, underlined by a focus on next–gen learning and development, helped us reduce (staff) attrition rates to 16.9%. We will continue to accelerate investment in high–growth areas,” said Vijayakumar.

The board of directors has declared an interim dividend of Rs 6 a share. HCL announced a share buy-back programme of up to Rs 3,500 crore during the quarter. 

“Operating performance was in line with our expectations. However, the tax reversals aided the company to report a higher than expected growth of 20.75 in profit after tax. The key highlight of the quarterly result is the strong growth guidance of 10.5-12.5% in revenue for FY18. This is higher than its peers and reflects the management confidence. We have a 'Buy' rating on HCL and it has been our preferred pick in the sector due to relatively better growth outlook and attractive valuations,” said Sanjeev Hota, assistant vice-president at brokerage Sharekhan. 

For 2016-17, its net profit was Rs 8,457 crore on revenue of Rs 46,723 crore. It says it expects an Ebit margin between 19.5 to 20.5% for 2017-18.

Like larger peer Wipro, it has been aggressive in driving growth in newer areas such as cloud-based services and engineering design through acquisitions. Last month, HCL said it would acquire US-based mortgage business service provider Urban Fulfillment Services for Rs 199 crore ($30 million). Through the acquisition of UFS, a 15-year-old mortgage business process and fulfilment services provider, HCL aims to scale up its digital technology-based services. This will also help the company expand its local workforce in the US, as UFS has 350 skilled professionals.

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