HCL profits grow; management cautions against extrapolation

Oct 30, 2009 (The Economic Times - McClatchy-Tribune Information Services via COMTEX) -- HCLTF | Quote | Chart | News | PowerRating -- Is the anticipation of recovery in global IT demand a reality or a mirage? Are analysts reading too much and too early from the resilient performance of the top IT companies in the September 2009 quarter?

These questions pop up after tuning in to HCL Technologies' post-result management discussion. HCL Tech, the country's fourth-largest listed IT player, has delivered an impressive performance in the September 2009 quarter, but this comes not without a strong dose of caution. Though it has left bigger peers behind in terms of growth in revenue and operating profit on a trailing 12-month basis, the management has cautioned against extrapolating this performance to expect a similar growth in coming quarters.

This comes as a shock when viewed against the backdrop of the positive picture painted by other top tier IT exporters such as TCS, Infosys, and Wipro. Each of the top four listed IT exporters has reported new client wins and better employee utilization in the September quarter. Companies have also reported an increase in the order pipeline citing that clients are feeling more confident now than what they were a year ago.

But HCL Technologies has a different perspective to share. Its CEO Vineet Nayar feels that much of the new multi-million, multi-year order wins in the recent quarters were part of vendor consolidation by clients, especially in the finance vertical. In order to reconcile costs, IT consumers realigned their past vendor engagements. As a result, top Indian IT companies saw a slew of large accounts coming their way during this period. However, this phase is more or less over and the new vendor engagements would stabilize from hereon.

This is likely to make bigger new client engagements difficult unless clients take up new discretionary spends. "Our multinational peers have lost a business of few billion dollars over the past few quarters. This obviously has helped us. But now the only way I think we can grow in the next two quarters or so is by snatching away business from other vendors since discretionary allocation is at its bottom," Mr Nayar said while addressing analysts post-results.

The new discretionary spend, which refers to projects that improve operational efficiency, is least likely to recover soon. It may not sound audacious then to expect sluggishness for the IT sector in coming quarters. Also, the guidance provided by Infosys and the headcount data of TCS do reflect a kind of pessimism as pointed out in this column a few days ago.

The IT sector has witnessed renewed investor interest in the past few months. It needs to be seen whether investors decide to reduce their exposure to the sector given the possibility of a bleak scenario.

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