HCL stands out in tough environment

Growth rate, forecast better than peers'

HCL Technologies' revenue and profit figures were in line with expectations for the December quarter (Q3); many aspects help the company stand out. Sequential revenue growth (in dollar as well as in constant-currency terms) was higher than Tata Consultancy Services (TCS) and Infosys's. Constant-currency revenue grew three per cent sequentially, whereas TCS's was up two per cent and Infosys's fell 0.3 per cent. Healthy deal wins and continued growth in two key verticals of infrastructure management services (IMS) and engineering and R&D (research and development) services fuelled HCL's results. Second, the company maintained its constant-currency revenue growth forecast of 12-14 per cent for this financial year, which is higher than that of Infosys at 8.4-8.8 per cent (TCS does not give a forecast). This also assumes significance as Infosys has toned down its full-year forecast for the third time this financial year. HCL sounds more confident than its peers despite the tough information-technology (IT) environment companies are operating in now.

Continued emphasis on acquisitions, coupled with focus on rebid markets (contracts coming up for renewal), is another reason behind HCL's revenue strength. This is also reflected in the fact that the company expects acquisitions done after September 2016 (including Geometric) to contribute additional 60 to 100 basis points to its FY17 revenues.

As against expectations of a squeeze in Ebit (earnings 0r profit before interest and tax) margin over September quarter, HCL's figure was up 30 basis points to 20.4 per cent on higher operational efficiencies as well as rising focus on automation. Management is confident of keeping this metric in a tight band of 19.5 to 20.5 per cent this financial year. Amid worries over possible visa-related restrictions on Indian IT companies catering to US market, HCL is better off. The fact that only about 35 per cent of HCL's US-based employees are on H1B visas makes it more immune to any adverse development (higher wages, cap on number of visas). This number is much higher for most other large tech companies at 50-70 per cent. This enables HCL to get a stronger grip on its margins, believe analysts. 

Most analysts remain positive on HCL stock. At current levels, it trades at 13 times the company's FY18 estimated net profit; the valuation is inexpensive compared to peers such as TCS (16 times) and Infosys (14 times).