A transformed HCL hits the sweet spot

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SummaryHCL’s margin performance has emerged as one of the key features of this IT earnings season thus far.

HCL’s margin performance has emerged as one of the key features of this IT earnings season thus far. The way in which the company has been able to put together better-than-expected margins despite strong headwinds has placed the IT firm above its rivals. In the July-September quarter the firm registered an EBIT margin of a little over 19%, sustaining the momentum. Though headwinds in the form of forex volatility and wage hikes had a marginal impact, its utilisation levels took good care of the overall margin play. A clutch of analysts were expecting to see wage hikes spoiling the party for HCL but that did not quite happen. The HCL management can take a whole lot of credit for achieving this.

Its last quarter performance is in line with what the market has now come to anticipate from HCL. The IT major has been surprising industry watchers for nearly a year with its consistent performances. What is exciting is the fact that the company has been able to do very well in its American and European markets. When most of the IT firms are trying to focus on emerging markets and developing their product platforms, HCL has concentrated on what gets the maximum value i.e. focus on software’s two key markets. With many contracts up for renewal shortly, HCL has camped around these parts trying to hit the sweet spot. On a LTM basis Europe grew 17% and Americas rose 18%. Sequentially, the firm recorded a rise of 2.7% in Europe and 4% in Americas.

A report from Prabhudas Lilladher has said that the company has reaped the benefits of margin tailwinds due to projects transitioning offshore in the first quarter. The management remains confident of using levers like pyramid rationalisation, facility consolidation and utilisation improvement to help retain the margin, the report stated. The company’s 4.5% sequential volume growth, sustained operating margins and 12 large deals wins were key positives, noted a Motilal Oswal report. Revenue growth in constant currency was 2.9% QoQ and dollar revenue at $1,114 million grew 3.2%, only marginally below its estimate of $1,119 million. Growth drivers for the quarter included IMS (+10.3% QoQ), healthcare (14.9%), retail (10.9% QoQ), media (7.4% QoQ) and BFSI (4.1% QoQ). Stated a Barclays report, “The results are another step in cementing HCL Tech’s position within the larger IT services peers group due to consistent growth and improving

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