India's HCL posts revenue growth that lags peers but profit soars

October 17, 2013

* Books September-quarter profit of 14.16 billion rupees vs 13.36 billion rupees estimate

* Relies on data centre and network services for growth

* Lags peers in revenue growth

By Harichandan Arakali

BANGALORE, Oct 17 (Reuters) - HCL Technologies, India's No. 4 IT services exporter, reported quarterly revenue that grew at a slower pace than that of its rivals, sending its shares lower though profit beat market expectations by rising 64 percent.

HCL relies heavily on contracts to manage data centres and networks for revenue growth, whereas peers Tata Consultancy Services Ltd and Infosys Ltd earn a greater proportion of revenue from higher-margin software services.

HCL's revenue in dollar terms grew 3.6 percent in July-September from April-June. This compared with 3.8 percent at industry No. 2 Infosys, and 6 percent at industry leader TCS, thanks in part to an acquisition in France.

Hardik Shah, an analyst at KR Choksey Shares and Securities, was expecting 4 percent, making HCL's topline "a bit disappointing."

Consolidated net profit for the three months ended Sept. 30 was 14.16 billion rupees ($229 million), compared with the 13.36 billion rupee average of 25 analyst estimates according to Thomson Reuters I/B/E/S.

Shares of HCL fell on Thursday after the company announced earnings by as much as 2.6 percent to 1131.20 rupees.

"It's a high dependence on one vertical, that's why the company is trading at a discount compared to the peers," Shah said by phone from Mumbai, referring to infrastructure services, or the remote management of data centres and storage networks.

Infrastructure services accounted for 33.1 percent of revenue in the September quarter compared with 26.6 percent a year earlier. Software application services, the staple of India's $108 billion outsourcing industry, accounted for 45.7 percent from 50.8 percent.

"The infrastructure business is largely underpenetrated, globally, less than 5 percent from an Indian (vendor's) standpoint," said HCL Chief Executive Anant Gupta in a conference with reporters. "We'll see significant growth over there, in that business."

HCL's infrastructure services rose 8.8 percent in the September quarter, while software services rose 1.1 percent.

Infrastructure services currently yield profit margins that are lower by a few percentage points compared with software services, said Chief Financial Officer Anil Chanana.

HCL can raise infrastructure services margins by supporting customers migrating to cloud computing, Gupta said. Under this model, companies rent processor power and storage rather than buying them.