HCL Tech shares gain 5% on strong revenue growth in June quarter

Shares of HCL Technologies gained 5 per cent to Rs 1,074 apiece on the BSE in the intra-day trade on Thursday after the company posted double-digit revenue growth in the first quarter of the financial year 2019-20 (Q1FY20). In constant currency (CC) terms, the company’s revenue grew 17 per cent year-on-year (YoY) and 7.7 per cent on sequential basis.

The information technology (IT) firm maintained its revenue guidance of 14-16 per cent in CC term and margin guidance of 18.5-19.5 per cent for the quarter under review, as it expects revenues flow from the IBM IP (intellectual property) deal from second quarter onwards.

The company’s consolidated net profit, however, declined 7.6 per cent YoY and 13.5 per cent QoQ at Rs 2,220 crore, against an average analysts' estimate of Rs 2,344 crore.

HCL Tech has concluded acquisition of IBM IPR and expects the integration effective Q2FY20 as it made first tranche of payment of US$900 million. It expects incremental revenues of about US$ 135million, Gross margins of 50 per cent and Amortisation of 20 per cent on this new revenue stream.

Strong organic growth performance in Q1 would imply that HCL Tech would clock sector-leading growth even on organic basis which make us believe that the stock could see significant potential re-rating as it recoups its profitability, according to analysts at Dolat Capital.

Despite close of the IBM deal a month later than expected, analysts at Elara Securities raise FY20 USD revenue growth estimate to 15.8 per cent from 15.0 per cent and FY21 to 8.1 per cent from 7.8 per cent. Due to the late close of the IBM deal and investments in Mode-2, the brokerage lowered EBIT margin by 13 bps (basis points) and 26 bps for FY20 and FY21 and PAT by 2.4 per cent and 2.6 per cent for FY20 and FY21, respectively.

Motilal Oswal Financial Services (MOFSL) maintains ‘neutral’ rating on the stock despite a strong top-line performance. The brokerage firm's EPS estimates are down by 6.5-8 per cent for FY20/21, of which 6 bps is on account of the higher effective tax rate at 24 per cent (v/s 19-20 per cent earlier), arising due to goodwill from IBM’s IP purchases. The revenue performance from IPs post the integration next quarter needs to be watched, it noted. 

At 12:54 pm, HCL Tech was trading 4 per cent higher at Rs 1,067 and was the top gainer among the S&P BSE Sensex stocks. In comparison, the benchmark index was up 0.21 per cent at 36,772 levels. A combined 3.7 million shares changed hands on the BSE and NSE, till the time of writing this report.