HCL Tech’s Q2 ahead, but pre-result build-up keeps a check on stock

HCL Technologies Ltd did pretty well in the second quarter like some of its larger peers in the IT industry. Revenues increased by 4.5% sequentially in constant currency and were ahead of the Street. But the firm’s stock price dipped about 3% post the announcement as some of these expectations appear to have been built-in into the stock price. The stock had increased by about 38% over its pre-covid highs, and about 106% higher over March lows.

HCL Tech’s 6.4% sequential increase in revenues also compares well with peers. The recovery in IT spends and deliveries is visible with all its verticals doing well. Its main vertical of IT and business services grew 4.9% sequentially, which is encouraging given the circumstances. Revenue growth is also broad-based across geographies showing decent sequential growth.

HCL Tech retained its guidance at 1.5-2.5% for the coming quarters.

HCL Tech also did well on the margins front given lower costs and higher offshoring. The firm’s Ebit margins stood at about 21.6%, which has come in higher than the Street’s expectations. This was higher by about 110 basis points. Some of its verticals have been able to command higher margins, besides costs controls due to the pandemic such as travel expenses are also aiding margins.

HCL Tech has also raised its margin guidance for the coming quarters. The firm’s improved guidance of 20-21% as against 19.5-20.5% shows that some of the costs control modes are sustainable. Besides, the company also lowered its working capital.

While the earnings per share over the last 12 months amount to about ₹45.20, HCL has also increased its pay-outs which the Street was looking for after the high cash flow generation in the past year. Analysts had pointed out earlier that HCL Tech had disappointed with a non-committed payout policy so this will come as a consolation.

However, it does not appear that the Street will increase earnings forecasts for the coming years. On that count, HCL Tech’s about 15 times price-earnings over the next year seem reasonable. Note that some of the larger peers are trading at valuations of about 21-25 times.

Even so, the stock had about 19% gains in the past two months. That could pose some headwinds as the gains on margins have been largely pencilled in.