The June quarter has kicked off the good times for the Indian IT sector, holding out the promise of higher perks for the millions of IT professionals.
HCL Technologies, among the top five Indian IT firms, which reported strong growth in its enterprise applications for the first time since the recession began two years ago, pointed to the $50 billion industry having turned the corner.
“During the last two years, most of our growth, as well as the big contracts, used to come from our ‘run the business’ services such as infrastructure and application development… However, the last quarter finally come back to ‘change the business’ solutions such as enterprise applications, research and development etc.,” said Vineet Nayar, CEO of the $2.7 billion enterprise.
“It’s hard not to be excited by a $ revenue growth at 7.7% quarter on quarter (9.1% quarter on quarter in constant currency) – which has beaten peers Infosys, TCS and WiproYet, the results raise fresh questions on the company’s strategy, which is paying off handsomely on revenues, but poorly on Ebitda. We expect no change in our earnings estimates despite the revenue beat,” said Bhavtosh Vajpayee & Nimish Joshi of CLSA Asia-Pacific Markets in a note after the results.
Ebitda margins were down 110 basis points sequentially to 18.6%, driven by continued losses in the BPO business. The company’s software services segment was also impacted by higher sub-contractor costs.
“We are placing our current Outperform rating on the stock under review pending clarity on the Ebitda trajectory for the company,” Vajpayee & Joshi said.
Indeed, HCL’s 7.7% growth in dollar revenues growth over the fourth quarter of last fiscal was spearheaded by enterprise applications, which gets most of its revenues from deploying huge, company-wide software suites such as SAP and Oracle.
The unit had underperformed others such as outsourced infrastructure management during the recession as companies froze their IT expansion plans and moved to conserve cash by outsourcing the management of their existing infrastructure.
During the last quarter, ‘expansionary’ services such as enterprise applications and R&D grew by 12% and 11% each. In comparison, bread and butter services such as infrastructure 9% and application development grew by 6.7% each while the company’s revenues grew by 7.7%.
“We are seeing the return of budgets to the sort of projects that haven’t been around for some time,” said Steve Cardell, head of HCL’s London-based enterprise applications subsidiary HCL Axon, acquired in late 2008.
The new contracts include both large SAP and Oracle roll-outs by global giants as well as numerous small projects such as business intelligence or data-mining, product design and R&D.
Encouraged, the firm will now expand its India development presence by hiring 1,000 experienced SAP and Oracle professionals in India over the next six months.
HCL’s rolls swelled by a record 6,500 people in the last quarter, its highest net addition in the last two years.
Out of the 11,000 people it hired during the quarter, around 70% were experienced workers, Nayar said.
With the clients going back to expansionary mode, Nayar saw a ‘war for talent’ as everyone tries to ‘stock up’ on employees for the anticipated growth.
“People did not invest in talent and training in the last 24 months.. Suddenly, in anticipation of growth, there is a scamble for talent even though there is no real immediate scarcity of talent..,” he said.
HCL has shot off increment letters to most of its employees which is likely to squeeze its profits in the current quarter, officials said. “Some increments due in October have been advanced to July,” Nayar said, refusing to reveal the extent of salary increments. He, however, saw industry-standard increments considerably north of the “8-10%” suggested by reporters.
HCL posted a 4% quarter on quarter decline in net profit, was hit hard by the steep fall in the value of euro.
The currency has lost around 15% of its value in the last six months due to worries over soveriegn debt levels in Europe. As a result, the contribution of Europe, including non-Euro Britain, shrunk from 28.5% a year ago to 24.6% of the total revenues during last quarter, despite stable volumes.
Volume growth for HCL, at more than 9%, was higher than the top three. Wipro had posted a volume growth of around 5% while TCS and Infosys, the leaders in the industry, had reported volume growth of 7-8%. HCL, which posted net profits of $73.6 million during last quarter, was dragged down by the performance of its shrinking BPO business, which still accounts for around 10% of the total revenues. Nayar said it will take another four to six months for the BPO business to stop making losses.
“We are investing $4-5 million every quarter to create a new platform [for the BPO business,]” and till then, it would continue to post losses,” he said. The BPO business posted a loss of $6.5 million before taxes and finance charges, eating into the $120 million profits created by the IT services business.
HCL is in the middle of a strategic shift from “non-core” BPO services such as outbound marketing calls to services that can be bundled with its IT services such as infrastructure management.
Source:http://www.dnaindia.com/money/report_hcl-bests-infy-tcs-wipro-says-it-growth-back_1416371
