Information technology stocks have outperformed the markets this year on the expectation that fiscal year 2019 (FY19) will be far better for the sector compared to the preceding year.
And thanks to the “a rising tide lifts all boats" principle, even shares of HCL Technologies joined the party. But the company’s March quarter performance and its guidance for FY19 suggests none of this is true in its case.
HCL Technologies had guided for growth of between 10.5% and 12.5% in constant currency terms for the year till March 2018. It managed to reach the lower end of its guidance “huffing and puffing", as an analyst puts it, “with the help of acquisitions". In FY19, it has guided for 10.5% growth at the mid-end of its guidance range, and has said that about half of this will come from acquisitions and other inorganic activity. In other words, the organic business will grow by just 5-7%.
It’s little wonder HCL Technologies’ shares fell 4.5% on Wednesday. The company’s guidance somewhat resembles Infosys Ltd’s subdued growth forecast as well.
Even in FY18, a large part of growth came from acquisitions. The core infrastructure management services and application services business, which accounts for around 72% of revenues, reported a sharp drop in growth.
Anil Chanana, chief financial officer at HCL Technologies, says that the company is helping customers transition to cloud and digital services, which have an initial negative impact on revenues, but result in long-term gains in terms of customer stickiness.
An analyst at a multinational brokerage firm says that the sluggishness rather reflects underinvestments in digital services. “Companies that were ahead-of-the-curve with investments in new technologies are leading in terms of growth," he adds.
HCL Technologies’ digital, analytics, cloud and cybersecurity practices grew 29.4% last year, higher than the company average. But at less than 15% of overall revenues, it is considerably small to move the needle. The platforms business grew at a rapid pace aided by acquisitions.
According to Chanana, the infrastructure business is placed better than the year earlier. Business and deal momentum is better, although deal sizes have become smaller.
Still, as the proverbial saying goes, the proof of the pudding lies in the eating; investors would do well to wait for concrete signs of a recovery in HCL Technologies’ organic business.