HCL Technologies commentary calms nerves, but some worries remain
2 min read.Updated: 09 Apr 2020, 01:04 AM ISTR. Sree Ram
With covid-19 bringing the global economy to a standstill, the worry is that revenues of IT firms will fall in FY21
The performance will be aided by acquisitions HCL Tech did in the past
HCL Technologies Ltd’s end-March communication with investors on the impact of covid-19 has helped contain the fall in its share price to some extent.
The stock lost one-third of its value from the highs in February by 30 March, more than the 26% drop in the Nifty IT index. After the recovery in the past few trading sessions, its performance is on par with the index.
The company said that work-from-home arrangements have not disrupted its operations. Besides, a large part of project bookings happened in January, before the lockdown came into effect. “While the impact on this quarter’s (Q4 FY20) numbers is yet to be quantified, we don’t expect it to be significant," said HCL Tech in a statement.
Low exposure to troubled verticals, such as oil and gas, travel and hospitality, and high-end retail, also cushions the company to some extent from the current disruption to global economy. Consequently, analysts expect HCL Tech to report a relatively better performance in Q4.
Analysts at Kotak Institutional Equities expect HCL Tech to report relatively better (0.8%) sequential revenue among large IT firms for the quarter. “HCL’s FY2020 annual revenue outlook of 16.5-17% implied 0.3-2% quarter on quarter revenue growth guidance for March 2020 quarter. Our estimates stand at 0.8% revenue growth at the lower end of the implied band," said analysts at Kotak in a note. Sequential revenue growth of larger peers Tata Consultancy Services Ltd (TCS) and Infosys Ltd is expected to be lower.
The performance will be aided by acquisitions HCL Tech did in the past. The constant currency organic revenue growth is projected at 5.7% from the year-ago quarter, higher than TCS’s, but slower than Infosys’s projected growth of 6.8%, show Kotak’s estimates.
Even so, the future remains uncertain. With covid-19 bringing the global economy to a standstill, the worry is that revenues of IT firms will fall in FY21. The impact will be pronounced in the current quarter (Q1 FY21), as much of the world is in lockdown mode.
In this backdrop, investors will try to gauge the impact of business closures on HCL Tech’s order pipeline, if clients ask for postponing project execution. Delay in execution and business slowdown can impact revenue and profit margin.
With much of the global economy in a downturn, revenue trajectory of the products division will also be tracked, especially since the company has made significant investments in this business. “HCL’s organic engine was enjoying a resurrection of sorts in FY20, along with handsome contribution from its inorganic arsenal. We believe FY21 will be devoid of growth and while its products and platforms business should help HCL maintain margins, utilisation dip will strain margins," said analysts at Edelweiss Securities Ltd in a note.