HCL Tech margins unsustainable; guidance aggressive: Kotak

Moneycontrol Bureau

Brokerage house Kotak Securities has retained its bearish call on HCL Technologies, citing unsustainable profit margins and risky revenue model as the main reasons.

In its report reviewing the company’s March quarter earnings, Kotak analysts Kawaljeet Saluja, Rohit Chordia, and Shyam M. have termed the management’s margin guidance of 18-19 percent as being “aggressive.”

Extracts from the Kotak report:

"Growth without/or marginal people addition has been the hallmark of HCLT’s performance for past the few quarters. HCLT’s per person revenue productivity is now 13-25% higher than other Tier-1 IT even as the reported offshore pricing is lower than peers."

Reading between the lines, it is evident that the Kotak team is skeptical of the numbers.

"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 2 times of peers) and growth that is driven by relatively lower-margin infra management business raises concerns on sustainability. We find management guidance of margins aggressive."

And, the stock is not cheap either, say the trio.

"Revenue growth that is single-service driven, stretched operating metrics with unsustainable profitability and sticky attrition numbers raise the risk profile of the business. Valuations at 14 times FY2014(estimated) earnings are not inexpensive either."