( Photo: Ramesh Pathania/Mint)
( Photo: Ramesh Pathania/Mint)

HCL Technologies’ December quarter growth rebound should please investors

  • Revenues in constant currency terms increased 5.6% on a sequential basis
  • HCL Tech reported a 30 basis point contraction in profit margins to 19.6%

Shares of HCL Technologies Ltd have underperformed the Nifty IT index by more than 17% in the past year. However, the December quarter results released after the market hours should help the stock gain some momentum.

Revenues in constant currency terms increased 5.6% on a sequential basis. Organic growth or revenues excluding the contribution from acquisitions stood at 4.4%, notably higher than the Street’s estimates.

But on the flip side, HCL Tech reported a 30 basis point contraction in profit margins to 19.6%. While analysts were expecting an improvement, it must be noted that most large IT companies saw moderation of profitability in the December quarter, reflecting the general rise in employee costs.

Importantly, the company now says it is confident of growing at the higher end of its 9.5-11.5% revenue growth guidance in constant currency terms. Earlier, it was expecting to meet the mid-point of the growth guidance. The upward revision in growth expectations reflects strong execution and order bookings.

Revenue contribution from top five clients increased from 15.8% in the year-ago quarter to 17.4% last quarter, reflecting revenue accretion from recent large order wins.

(Graphic: Naveen Kumar Saini/ Mint)

The infrastructure services vertical, which generates 36% of HCL Tech’s revenues, grew 16.5% from a year ago. In the earlier two quarters, the segment clocked a growth rate of 2-4%. Growth at the application services business, which generates one-third of total revenues, improved, though the rates were below the company averages.

Among the business verticals, the financial services and manufacturing segments continue to lag. But the management expects the performance to improve this calendar year on the back of strong deal wins. The company did not share the quantum of deal wins in value terms, stating instead that it had another quarter of “record" order bookings.

Prateek Aggarwal, chief financial officer, said the company has seen strong double-digit growth in order bookings. This should not only help HCL Tech register healthy performance in the current quarter (Q4), but places it well for FY20 as well.

The performance and the commentary should aid the HCL Tech stock, which is trading at a notable discount to larger peers. Over the last year, the stock underperformed the Nifty IT index as the company embarked on intellectual property (IP)-driven investments.

Concerns about the efficacy of IP-related investments and their possible impact on margins contributed to the stock’s underperformance. HCL Tech now plans to focus on execution and is not aggressively looking at such investments. While the commentary and the performance should aid the stock, investors should also keep an eye on the margin trajectory.