In an interview with CNBC-TV18 Bhavin Shah, CEO, Equirus Securities shared his views on IT player HCL Technologies Q2FY14 earnings and his outlook on the stock.
The company exceeded analysts expectations with the second quarter (October-December) consolidated net profit rising 5.7 percent quarter on-quarter to Rs 1,496 crore. Consolidated revenue rose 2.8 percent to Rs 8,184 crore crore in the quarter ended December 2013 as against Rs 7,961 crore in earlier quarter.
Shah said that the headline numbers are good, but concerns related to balance sheet given its heavy focus on infra services remain. Its infra services segment has seen a slower growth of 4.8 percent sequentially, which suggests that IT services have grown even less because overall growth in constant currency is just 3 percent, he added.
Equirus Securities is cautious on the stock.
Below is the edited transcript of Bhavin Shah's interview with CNBC-TV18
Q: Your first thoughts on HCL Technologies numbers?
A: The headline number is better than our forecast. The company doesn’t give any guidance, so there is always going to be room for upside, but the year-on-year revenue growth has improved slightly from 14 percent last quarter to 14.5 percent. So, the headline numbers are good. However, one has to look at some of the balance sheet details with HCL given heavy focus on infra services where the balance sheet is used extensively. I noticed and I am still doing the math that they have given June to December comparison of account receivable and on incremental basis half of the revenues are going into account receivables and also the unbilled revenues are also half of the revenues. So, there is a slight deterioration on that front though I am probably one of the few people who focus on this kind of details.
Q: How would you approach the stock now and given the kind of run-up that we have already seen, what would the earnings per share (EPS) upgrades look like and where would you be positioned in terms of a target price?
A: It is too early for me to comment on that. The EPS numbers could go up slightly. The stock has rallied strongly and I have some concerns around the balance sheet and that is why I am cautious on the stock. The company has cut dividend payout sharply. Unless is see some real change there, I do not think it’s difficult for me to be constructive.
Q: What were your dollar revenue expectations? At 4 percent it is a handsome beat over Infosys, something that they couldn’t achieve last. They were trailing Infosys. This time it has beaten and how the Infosys dollar revenue growth. Wouldn’t that add up too much?
A: Our dollar revenue number was USD 1317 million and it has definitely beaten that by USD 4 million. It is good but still we have to see how much of growth has come from infrastructure because HCL Tech’s growth has been coming from infra services.
Q: The infra services segment has seen a slower growth at about 4.8 percent sequentially, slow compared to what we have seen in the last many quarters. How would you react to that?
A: That suggests that the IT services have grown even less because the overall growth in constant currency is just 3 percent. So, that concern continues in that case.
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