HCL Technologies Ltd’s June quarter results support the faith investors have reposed in it lately. Revenues rose 2.6% sequentially, as expected, and more importantly, margins were stable despite the appreciation in the rupee. Peers such as Tata Consultancy Services Ltd (TCS) and Infosys Ltd reported a decline in margins largely owing to the stronger rupee.
In fact, while margins have steadily declined for market leader TCS in the past year, HCL Tech has more or less maintained margins even compared to a year ago. This is commendable, especially since the company has been integrating lower-margin businesses it acquired in the past 12-18 months.
And the stability in margins appears to be one of the main reasons its stock has done far better than peers. In the past year, HCL Tech’s shares have risen nearly 20%, while the National Stock Exchange’s Nifty IT index has declined by 3%. The other attraction for investors was relatively lower valuations, although the differential with peers such as Infosys has more or less disappeared after last year’s rally.
As far as growth is concerned, there’s nothing much that separates the company from the rest of the pack. Growth at large Indian IT companies has fallen to low single digits, and HCL Tech is no different. The company has guided for growth between 10.5% and 12.5% in the current fiscal year; although analysts point out that four-five percentage points of that will come from acquisitions.
HCL Tech has reiterated commentary by other firms in the sector with regards to the demand environment; namely that there is downward pressure on demand for traditional services, but that there is growing demand for new services. The decline in growth rates shows that the two clearly aren’t offsetting each other. Analysts say Indian IT companies are losing share to firms that specialize in the new digital services, without the baggage of legacy technologies.
As such, growth is expected to remain a struggle for some time to come. And since HCL Tech’s shares have made up the valuation differential with peers in the past year, it may not make much sense to expect continued outperformance. Not surprisingly, the HCL Tech stock gave up the bulk of gains made in early trading by the end of the day’s session.