Will HCL Technologies’ buyback help maintain outperformance?
As a stand-alone event, HCL Technologies’ buyback isn’t a game changer, although the general shift towards increased payouts is a welcome sign
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HCL Technologies Ltd’s shares have outperformed peers by a considerable margin the past year. They have risen 16% in the past year, compared with a 1% rise in Tata Consultancy Services Ltd’s shares and a 19% decline in Infosys Ltd’s shares. Shares of Cognizant Technology Solutions Corp. have risen around 7% in the past year.
According to some analysts, the company’s portfolio of services makes it better placed than its peers. Analysts at Nomura Research point out that the company has an exposure of around 60% to the fast-growing (relative to industry) infrastructure management services (IMS) and engineering services segments. In addition, the company has done better than peers in key segments such as the US region in the past 12 months. And while its competitors have guided for flat to lower profit margins in 2017-18, HCL’s post-results commentary suggested an improvement in the coming year, assuming constant currency rates.
Of course, all this is not to suggest that HCL is unaffected by the slowdown in the sector. While it has guided for revenue growth of between 10.5% and 12.5% for FY18, some of this will be aided by acquisitions. On an organic basis, and adjusted for currency fluctuations, Nomura’s analysts estimate a growth of merely 5.5-7.5%. And growth at the key IMS business has stuttered in the past couple of quarters for the company.
“Growth in IMS, the usual growth driver (for the industry), was a tad weak (in the March quarter)”, analysts at Kotak Institutional Equities wrote in a note to clients.
It’s in this backdrop that HCL Tech will soon commence its buyback of shares worth Rs3,500 crore. Nearly all large IT services companies have resorted to returning higher than usual amounts of cash to shareholders to assuage concerns about growth. And, like its peers, the buyback will result in a reduction of less than 3% in equity base. As a stand-alone event, it isn’t a game changer, although the general shift towards increased payouts is a welcome sign. In any case, the buyback doesn’t give it any edge vis-a-vis peers.
On paper, HCL Tech may have a higher exposure to higher growth services. But to sustain its outperformance in the past year, the company will have to demonstrate it can grow profits at a faster pace vis-a-vis peers.