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HCL Tech’s Q4 sees negligible virus impact, but FY21 is a different story

  • Lockdowns and the loss of business at client firms is projected to hit revenues at the IT services company
  • Analysts say high exposure to infrastructure management services can help HCL Tech capture a greater share of current digitization wave

HCL Technologies Ltd did better than larger peers Tata Consultancy Services Ltd (TCS) and Infosys Ltd in the March quarter (Q4). Revenues grew 0.8% sequentially in constant currency terms, while operating margin expanded 70 basis points to 20.9%.

In comparison, revenues of TCS and Infosys declined sequentially. And while TCS clocked a marginal 10 basis points expansion in margins, Infosys saw its margins narrow by 80 basis points.

HCL Tech’s management had said that there would be a limited impact of covid-19 on its Q4 performance. According to the management, the relatively better performance reflects the firm’s early response to covid-19, beginning as early as January. Consequently, the revenue loss due to covid-19 was minimal or less than $10 million, said Prateek Aggarwal, chief financial officer, HCL Technologies.

Graphic: Naveen Kumar Saini/Mint
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Graphic: Naveen Kumar Saini/Mint


But investors don’t seem that impressed. HCL Tech’s shares are down about 18% from its highs in February, which is nearly the same as the decline in the BSE IT index. This is simply because the company isn’t really immune to the impact of covid-19 on its business. “We see impact on growth in the short term; however we are not in a position to quantify it. Assuming things stabilize, we expect a better second half (H2 FY21)," said C. Vijayakumar, president and chief executive, HCL Technologies.

For what it’s worth, the company saw record order bookings in Q4. “We had a good year on renewals and are entering FY21 with strong positioning in the market," said management. The covid-19 led digital investments are projected to benefit HCL Tech’s products and platforms business. Deal flow has improved from 15 April, it added.

But the momentum is not broad-based. Discretionary spends are being deferred in industrial sectors such as aerospace and automobiles. However, the impact is seen to be low in the financial services and telecom verticals.

Even so, some customers are asking for price reductions. Lockdowns and the loss of business at client firms is projected to hit revenues at HCL Tech.

As analysts at Investec Capital Services (India) Pvt. Ltd say, high exposure to infrastructure management services can help HCL Tech capture a greater share of current digitization wave. “Companies globally are aligning their IT networks and infrastructure for work from home and driving online sales in a period where physical channels are virtually shut. We believe this calls for continued investment in the IT infrastructure and security spends," said the analysts.

But as HCL Tech’s shares suggest, investors expect the company to be impacted as much as the rest of the industry by covid-19.

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