HCL Technologies shares: Profitability supported by unsustainable rise in utilisation rates
Growth without/or marginal people addition has been the hallmark of HCL Technologies' performance for past the few quarters. Q3FY13 was no different, with solid revenue growth of 3.2% despite people decline. HCLT’s per person revenue productivity is now 13-25% higher than other Tier-I IT firms, even as the reported offshore pricing is lower than peers. Profitability for the quarter was supported by an unsustainable increase in utilisation rates. We maintain our Cautious stance—high-risk business and unsustainable margins worry us. Maintain Reduce with unchanged target price.
Good headline numbers but the devil lies in the details: HCLT reported 3.2% quarter-on-quarter revenue growth to $1,191 million, in line with our estimate. Net income of R10.2 billion was 8.2% ahead of our estimate and largely contributed by other income. Revenue growth for the quarter was once again infra-led, which grew 8.6% q-o-q and 41.6% year-on-year. Growth in software services was muted at 1% q-o-q and 4.8% y-o-y. Ebitda (earnings before interest, taxes, depreciation and amortisation) margin was stable at 22% and 30 bps ahead of our estimate. Margin performance of the company continues to surprise us. The company announced $1 bn worth of new deals singing for the quarter.
Effort-less growth—headcount declines again: Employee metrics of HCLT are puzzling. Overall and IT services headcount declined for the second consecutive quarter. Net employee addition was a marginal 1,752 on a y-o-y basis (2.4% growth). Quarterly annualised attrition rate increased to 28% from 24.8% in Q2FY13. High and sticky attrition is a surprise for a company that is performing well. What is even more surprising is that the company increased utilisation rates by 190 bps to 83.8%, despite such high attrition. Peers have struggled to maintain utilisation at reasonable levels during periods of high attrition.
Profitability is unsustainable with stretched core metrics: At the risk of repetition, we are surprised with HCLT’s high profitability and the near convergence with Wipro. That HCLT has lower offshore pricing (16-18% lower than Infosys and Wipro), inefficient employee pyramid captured by delay in absorption of freshers, higher subcontracting costs (at least