HCL Tech’s results may not dispel concerns about the sector

HCL Technologies Ltd’s March quarter earnings reinforced the belief held by a large section of the Street that Infosys Ltd’s problems are company specific. HCL Tech reported a 1.9% sequential growth in revenue in constant currency terms, against a 2.1% sequential drop in the case of Infosys.

The company’s post-earnings commentary was positive, too. Not surprisingly, its shares rose 2.8% after the results—HCL Tech’s shares are now at the same level as they were prior to the earnings announcement by Infosys, whose shares are down nearly 14%. Shares of Tata Consultancy Services Ltd (TCS), Cognizant Technology Solutions Corp. and Wipro Ltd are down around 3% since Infosys’s announcement.

Clearly, investors have concluded that Infosys’s problems are largely company specific. But HCL Tech’s results show that it isn’t really smooth sailing for other firms. Its revenue from the US region fell by 1% in constant currency terms, while that from the financial services segment dropped by as much as 4.1%.

The US region and particularly the financial services segment are the major contributors to the Indian IT industry’s revenue. There have been news reports lately that demand from the financial sector in the US has been under pressure, and that IT services providers have even faced demands for price cuts.

Considering that revenue from this segment has declined now for two of the top five companies, and even the earnings of US-based International Business Machines Corp.’s (IBM’s) IT services business have been subdued, some of these concerns remain.

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Thankfully for HCL Tech, in the December quarter, the drop in this segment has been offset by strong growth in others such as telecom and healthcare. Besides, according to the company, growth in the financial services segment should bounce back in the coming quarters, on the back of some large deal wins. It has won deals worth $2.5 billion (Rs 12,875 crore today) in the past two quarters, and $1 billion of this is from the financial services sector, while $1.1 billion is from US-based customers. The company added on a call with analysts that there are market share shifts happening in the financial services sector in the US, thanks to which it has won these deals.

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While HCL Technologies’ quarterly earnings beat street estimates, Mobis Philipose says there has been an overall deterioration in the IT sector and that investors need to exercise caution

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But again, these are market share gains, and it doesn’t mean overall demand from this segment is back on track.

According to an analyst with a foreign brokerage, talk of Infosys’s company-specific problems are overdone. While there is little doubt that the company is facing operational and execution issues, even other firms have seen a drop in growth rates.

IBM’s IT services grew by just 0.7% on a year-on-year basis last quarter, compared with a growth of 10% a year ago. HCL Tech’s growth has dropped from more than 33.5% a year ago to 14.5% last quarter. TCS is expected to grow revenue by around 17%, about half the growth rate it achieved a year ago.

While Infosys has been worse off lately, not all of its comments about a volatile and sluggish demand environment can be wished away.

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