One reason why HCL Technologies Ltd remained on the investor radar, despite delivering subdued quarterly performances in the recent past, is its valuation discount vis-à-vis larger peers Tata Consultancy Services Ltd and Infosys Ltd. At around 13 times current fiscal earnings estimates, the stock is trading at a considerable discount to the 23 times earnings of TCS and Infosys’s 18 times earnings. The valuation discount reflects subdued expectations and the Q2 results may not alter this in a major way.

The results do show an improvement in growth but only incrementally. From a year ago, revenues in constant currency terms increased 10.5% compared to 8-8.5% in the earlier two quarters. On a sequential basis, they are up 3%, largely in line with Street expectations. Profitability has improved.

Importantly, the management expects revenue growth in the second half of the fiscal year to be better than what the company delivered in the first half, helping it achieve the mid-point of its objective of 10.5% constant currency growth for the full year. Deal momentum remains healthy.

The commentary is encouraging. The question, however is, will it help narrow the valuation gap with its larger peers? There is some scepticism about that.

What set TCS apart, accelerating gains in its stock, is a broad-based recovery. HCL Tech has seen incremental improvement in growth rates at key service segments. But much of the growth came from the engineering and R&D and business services, which generate less than 30% of revenues.

Growth at the application and infrastructure services businesses, which generate 70% of HCL Tech’s revenues, remains sub-par. Revenues at the application services business (which generates more than a third of revenues) are up just 1.8%. The management attributed the subdued growth to client-specific issues.

That said, HCL Tech’s Q2 results shows a notable improvement in the infrastructure services business—it grew 4.4% compared to 2% in the first quarter. The management sees a healthy outlook for this segment, which adds credence to a better second half vis-à-vis the first half of the fiscal year. It also expects the momentum in the engineering and R&D and business services continuing, which should aid growth.

The question is how much growth acceleration the company can see in the second half of the year. The Q2 results show incremental improvement in growth rates, widely expected by the market. But it is not yet clear if growth will exceed the previous year’s level, which is crucial for the stock re-rating. The third quarter results should provide more cues.

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