HCL Technologies is now posied for a rerating and earnings upgrade by most brokerages after its Q2FY14 exceeded street expectations on most fronts driven by margin improvement and good dollar revenue growth, Rajiv Mehta, IT Analyst, India Infoline said.
According to him, the company's EBITDA margins for the quarter at 26 percent could have been aided by perational efficiencies given the strong growth in infrastructure management services (IMS) and also the fact that wage hikes don't seem to have hit the margins.
Below is the verbatim transcript of his interview on CNBC-TV18
Q: It looks like a good set of numbers for HCL Technologies, what is your take?
A: Absolutely. They seem to have beaten on all fronts; especially the dollar revenue growth has beaten our expectations. We were expecting USD 13.07 million for revenues but they delivered USD 13.21 million. We can see that flowing through the bottomline as well because the bottomline in rupee terms is at Rs 160 crore odd.
Clearly the margins have not declined as we were expecting by 135 bps. They seem to have beaten expectations there as well.
Q: The EBIT margins have come in at 23.7 percent and EBITDA margins are 26 percent - will that also count as a fairly big achievement?
A: Absolutely because if the EBITDA is 26 percent when we were actually working with 24.9 percent kind of a number because of the wage hike impact but if the wage hikes have not impacted the margins then it essentially means that there has been a significant amount of operational efficiencies, which have come through in the quarter. So, this I assume could have been driven by a very strong growth in infrastructure management services (IMS).
I think if the operational efficiencies are driving the margins and they are able to hold on to 26 percent kind of a margin, which is even higher than Wipro that is pretty impressive.
Q: Are the numbers adding up to a definite increase in EPS estimates across the board by all brokerages and therefore perhaps re-ratings as well?
A: Yes, it should lead to that because usually the margin assumptions are on sequential basis and so if this quarter’s margins are at 26 percent, it would lead to a rerating in terms of higher assumptions of margins in the follow-up quarter.
Therefore, there will surely be earnings upgrades for HCL Technologies driven by both margin surprise as well as by a better than expected revenue growth.
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