HCL Technologies stands out amid IT gloom

However, it remains to be seen if HCL Technologies can sustain its performance


HCL expects growth of around 14% in the year till March 2017. Photo: Mint
HCL expects growth of around 14% in the year till March 2017. Photo: Mint

HCL Technologies Ltd’s shares have outperformed peers by nearly 25% in the past six months. In each of the three past quarters, the company has delivered better-than-expected profit margins, and growth that’s been ahead of some if its larger peers.

In the December quarter, revenues rose 3% in constant currency terms, aided partly by inorganic initiatives. Adjusted for these, growth would have been around 1.8% in constant currency, according to analysts, which is also ahead of peers. More importantly, operating profit margins were ahead of analysts’ expectations again.

The company expects growth of around 14% in the year till March 2017. Again, after stripping off the impact of acquisitions, growth will be fairly decent at around 9-11%, considering that industry growth is likely to end up in single digits this year.

In the last 12 months, growth has been driven by infrastructure management services, which grew 24.6% in constant currency.

In terms of verticals, manufacturing and public services have led in terms of growth. Even in the December quarter, services to these industries drove growth. Besides, the financial services vertical grew 4.5% sequentially. Like the rest of the industry, the retail, telecom and healthcare segments were weak, with revenues declining sequentially in each of these segments.

Interestingly, while Ebitda margins were expected to decline owing to an increase in wages, the company reported a 50 basis points improvement in margins instead. Ebitda stands for earnings before interest, tax, depreciation and amortisation.

Of course, it remains to be seen if the performance will sustain. Some analysts such as those at Kotak Institutional Equities seem unconvinced. They had a sell rating on the stock at the beginning of the year. Back then, HCL shares were even lower, while those of Tata Consultancy Services Ltd and Infosys Ltd were higher.

As such, HCL’s valuation gap with peers has shrunk further. Unless it maintains outperformance as far as growth goes, its investors are likely to be disappointed.

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