HCL Technologies: Positives priced in

But it stands out for industry-leading revenue growth guidance for FY17

 

Unlike its larger peers, HCL Technologies’ September  quarter results and forecast were relatively comforting. The healthy revenue growth forecast is in contrast to the cautious commentary given by Tata Consultancy Services (TCS) and Infosys. In fact, unlike Infosys which has trimmed its full-year revenue guidance for two quarters in a row, HCL maintained it at 12-14 per cent (in constant currency terms) for this financial year. This is way ahead of the seven-eight per cent growth expectation by analysts from TCS and Infosys’ forecast of eight-nine per cent. Management, too, remains fairly confident on the future prospects.
Anil Chanana, chief financial officer at HCL Technologies, says: “We have not seen any impact of Brexit yet. There have been no conversations around it though select customer conversations have focused on how we can reduce the costs. We have a very good deal pipeline in the US and do not foresee any impact from the US elections.”

What drives this divergence in outlook for HCL Technologies? For one, its focus on high growth segments like infrastructure management services (IMS) and engineering services. Harit Shah, analyst at Reliance Securities, says: “IMS is the key growth driver for HCL Technologies. Additionally, like last quarter, this quarter as well, there were four-five verticals witnessing healthy growth rather than just one or two verticals.”

In Q2, for instance, BFSI (banking, financial services and insurance), life sciences, retail, telecom and media verticals grew well and the deal wins, too, remained strong. Inorganic initiatives are the other growth engines for the company.  So, even as revenue at Rs 11,519 crore and net profit at Rs 1,899 crore for September quarter were in line with estimates, analysts could still raise their full year estimates marginally from here on.

The stock, however, gained only 1.9 per cent on Friday. One reason could be that it has outperformed the Sensex and larger peers in the past one-three months. It currently trades at 14 times one-year forward earnings, which is at a discount to larger peers. This discount, however, is likely to continue, as most analysts believe the company is compromising margins and taking more risks to chase growth and new deals. This fact is reflected in the margin movement as well. For instance, HCL Technologies’ earnings before interest and tax margin has come off from 24.1 per cent in FY14 to 20.5 per cent in FY16. In Q2 as well, this metric contracted 50 basis points sequentially to 20.1 per cent (though the decline was lower than expectations). Management guidance of 19.5 per cent to 20.5 per cent Ebit margin this financial year implies a contraction of 100 basis points to flattish movement over FY16 margin.

With regard to Friday’s announcement of its CEO Anant Gupta exiting the company, analysts say unless there is something more that the markets know, the exit is unlikely to impact the firm's future performance. For now, they say the stock is fairly valued.