Home / Markets / Mark To Market /  HCL Tech trails bigger peers despite strong third quarter

The shares of HCL Technologies Ltd have been weak this results season relative to those of other top-tier IT stocks. The reason simply is that HCL has lagged larger peers such as Tata Consultancy Services Ltd and Infosys Ltd on growth. These two companies reported sequential growth of 4.1% and 5.3%, respectively, in constant currency, while HCL’s growth was lower at 3.5%.

“HCL hasn’t beaten estimates to the same extent some of its peers have. Also, there is a small one-off benefit in revenues and margins, which makes the company’s performance more average when compared to peers," said an analyst at a domestic institutional brokerage. What’s more, the guidance for the March quarter was unexciting.

“The company expects revenue growth of 2-3% quarter-on-quarter (q-o-q) in constant currency in Q4 (organic growth 1-2%). Q4 guidance is a tad lower than expectations (compared to 0.5%-2.5% from Infosys and 1.5%- 3.5% from Wipro)," said analysts at Emkay Global Financial Services. Besides, the margin guidance for the year implies a drop in profitability in Q4, which is also a damper as far as investor sentiment goes. There was some impact of the wage hikes in the December quarter, but the residual impact is expected in Q4.

HCL Tech's growth in Q3 has been a tad lower than its larger peers, TCS and Infosys
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HCL Tech's growth in Q3 has been a tad lower than its larger peers, TCS and Infosys

The reported growth of 3.5% in Q3 is decent for a seasonally weak quarter and it also beat the company’s own guidance. “HCL’s revenues recovered completely from covid in 3Q with the company reporting 1.1% year-on-year (y-o-y) growth. Growth in 3Q was broad-based across verticals and segments. Growth was led by verticals recovering from covid shock with communications, manufacturing, and retail all driving growth," analysts at Jefferies India Pvt. Ltd said in a note to clients.

HCL’s margins were at a five-year high and like its peers this was largely on account of an increase in offshoring. However, expectations were high with IT stocks at all-time highs and TCS and Infosys whetting the appetite of investors with strong results. HCL Technologies shares are about 60% higher than its pre-covid highs.

“HCL Tech continues to be a strong play on digital foundation deals and long-term growth potential in ERD," analysts at Kotak Institutional Equities said in a note to clients. ERD stands for engineering, and research and development services.

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