HCL Technologies’ guidance for FY18 at odds with low Q2 growth
Investors were disappointed by the slowdown in HCL Technologies Ltd’s growth in the September quarter. Its shares closed with a loss of 0.71% as the company reported a mere 0.9% constant currency revenue growth on a sequential basis. In the previous four quarters, revenue growth was in the range of 2.6-3.8%.
According to the management, revenue from India declined as some projects reached closure. Excluding this, constant currency growth was 2%. Even then, it trails estimates of several analysts of growth of 2.4-2.8%.
The large services verticals—application and infrastructure—which together generated 75% of the company’s revenues in the previous year did not grow. “Moderation in both the key business verticals is a concern,” said an analyst with a domestic broking firm.
This concern was not visible in the commentary, however. The management retained constant currency revenue growth guidance at 10.5-12.5% for the current fiscal year. Operating margin (earnings before interest and tax) guidance was also retained in the 19.5-20.5% range. The management said it is comfortable meeting the lower end of the range. Still, that implies double-digit growth for the full year. Comparatively, Infosys Ltd expects revenue to grow at best 6.5% in constant currency terms.
According to analysts, a large part of HCL Technologies’ guided growth for the full year is likely to be contributed by acquisitions made earlier. Even so, the estimated organic growth of 5-7% for the fiscal year is matching that of its larger peers in India, say analysts.
That does raise questions on HCL Technologies’ ability to achieve its full-year guidance, especially given the seasonal weakness in the December quarter. The infrastructure services vertical, which contributes around 39% of the company’s revenue, is yet to pick up. The management says it is still some quarters away for deals to materialize here. The impact of projects’ closures in India is expected to linger for another quarter or so.
The management confidence appears to be based on momentum in other business verticals picking up. According to Anil Chanana, chief financial officer at HCL Technologies, bookings in application services, a large business division, have doubled when compared to the previous year. It is also seeing a pickup in business in continental Europe. The company changed its strategy for the business process outsourcing unit and expects it to gain traction.
While the commentary may be optimistic, it has to be backed by improving business momentum. “Another quarter of moderation in the applications and infrastructure services verticals will raise questions about its ability to meet growth guidance. Engineering services, which has done well in Q2, tends to be lumpy,” said the analyst cited above.
This quarter’s weak growth should make investors cautious about taking HCL Technologies’ guidance at face value.