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Our Bureau

New Delhi, Oct. 28 IT services company HCL Technologies on Wednesday posted a 10 per cent drop in consolidated net profit for the quarter ended September 2009, with its earnings dented by hedging losses.

The company continues to remain “cautious” about the overall demand environment and IT spends.

But what will clearly cheer its employees is the company’s decision to hike wages by up to 10 per cent based on parameters such as individual and business unit performance, skills and location of the employee.

The wage hike, effective October 1, will result in a 130-basis-point hit on gross margins over the next two quarters.

In spite of a strong show on the operations side in the quarter, HCL Tech saw its net profit falling to Rs 320.1 crore, from nearly Rs 356 crore in the same period last year; on a sequential basis this drop was 3.1 per cent.

The forex loss for the quarter stood at Rs 151 crore (Rs 80 crore).

Excluding this impact, net income at Rs 470.5 crore translates into 7.9 per cent rise year-on-year and 12.3 per cent sequentially. HCL Tech runs July to June financial year.

The consolidated revenue stood at Rs 3031.4 crore, an increase of about 29 per cent year-on-year and 4.2 per cent sequentially. This was primarily driven by volume growth.

In fact, both the topline and the net profit came just above the street expectations.

In dollar terms, the net profit dropped 12.3 per cent over the previous year to $66.5 million, while the revenue surged 25.8 per cent on the same period last year, to about $630 million.

The EBITDA margin improved 90 basis points at 22.7 per cent over last year (21.8 per cent), aided by tighter costs and expanded margins in IT services business.

The IT services business that includes software services and infrastructure services, accounts for an overwhelming majority of HCL’s overall revenue.

HCL said that there were still challenges relating to margin expansion in its BPO business.

Commenting on its forex losses, the IT firm said that in early 2008 it had taken hedge positions spread over 12 to 14 quarters ($2.4 billion), and has been booking heavy forex losses over the last couple of quarters.

HCL currently has $725 million in foreign exchange hedges (at Rs 40.50) and does not plan to take any new hedges.

“We still have about $130 million sitting on the balancesheet which is yet to go to the P&L account….The company will continue to post these losses with regard to hedging, till September 2010,” its CFO, Mr Anil Chanana, said.

The HCL CEO, Mr Vineet Nayar, pointed out that the company had already guided the street on hedge losses.

“We have also guided that October-December (Q2) and in the next four quarters we will see hedge losses…It’s unfortunate. We took the hedging decision and it went horribly wrong,” he added.

The company said that the deal flow was soft as the churn arising from vendor consolidation had more-or-less stabilised.

“We are seeing softness on deal flows because when the recession kicked in, the dissatisfaction of customers with their vendors reached its peak, and a lot of them sought new vendors.

In the last six months, there has been stability in customer-vendor relationship and so the opportunity for mega deals has dramatically reduced,” Mr Nayar said.

Large deals will make a comeback either with another cycle of recession particularly in Europe, or when the recession comes to an end, he added.

Mr Nayar also said that, for 2010, clients will tend to look at budgets on a quarter-by-quarter basis.

“The approach will be annual plans, but quarterly budgets. So in effect they will exhibit a soft commitment for the year and hard commitment for the quarter,” he said.

HCL Technologies added 665 employees on a net basis in its IT services division, taking its staff strength to 54,443 at September end.

The company added 28 new clients in Q1, and the total number of active clients now stands at 373.

HCL Tech shares dipped nearly two per cent on BSE on Wednesday to end at Rs 313.50.

More Stories on : Financial Performance | Software | HCL Technologies Ltd

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