HCL Tech’s Q1 results show Infosys is likely to be an outlier this fiscal2 min read . Updated: 19 Jul 2020, 10:24 PM IST
Revenues in dollar terms dropped 7.4% at HCL sequentially in the June quarter, even higher than the 7.1% drop at TCS. Infosys had reported a 2.4% decline in dollar revenue. But margins were better-than-expected
Now that the top four IT services firms listed in India have reported their results, it’s fairly clear who has come out on top. Tata Consultancy Services Ltd (TCS) kicked off the results season with a weak set of numbers, both in terms of revenue and profit margins. Wipro Ltd followed suit with a pleasant surprise on the profit margin front, thanks to massive cost-cutting, while Infosys Ltd left the Street’s estimates far behind both on revenue and profit. What’s more, it even stuck its neck out and said revenues are likely to be either flat, or grow 2% in the current financial year.
HCL Technologies Ltd was the last among the top four to report Q1 results, and they have turned out to be average, especially in comparison with Infosys.
Revenue in dollar terms dropped 7.4% at HCL, sequentially, in the June quarter, even higher than the 7.1% drop at TCS. Infosys had reported a 2.4% decline in dollar revenue. But margins were better than expected.
The sharp fall in revenue notwithstanding, HCL managed to limit the drop in margins to 40 basis points.
This is far better than the Street’s estimates, and also better than the 150 basis points drop in TCS’s margins. HCL said margins were aided by higher offshoring, reduction in expenditure, notably direct costs and sales, and general administration expenses.
Importantly, HCL’s operating profit in dollar terms has fallen only 6.1% in the past two quarters, much better than the 14.6% drop in TCS’s earnings post-covid. Infosys has managed to maintain operating profit at the same level as the two previous quarters.
Apart from the better-than-expected margin performance, HCL Technologies also calmed investor nerves about the future outlook, saying that it expects revenue to grow 1.5-2.5%, sequentially, on an average in each of the next three quarters.
Adjusted for the impact of acquisitions, this will translate into a revenue decline of 3.3% in FY21, assuming the company delivers at the mid-point of the guidance, said Investec Securities analysts. That is slightly better than the 5% dollar revenue fall analysts are projecting for TCS. But clearly, Infosys’s guidance of 0-2% growth is making it look like a clear outlier among top-tier IT firms.
Coming back to HCL’s results, the company said its order pipeline at the end of June was 40% higher compared with the end of March quarter, thanks to vendor consolidation, and digital and cloud modernization efforts of customers.
The company has guided for an operating profit margin of 19.5-20.5% for FY21, suggesting an improvement from the 19.6% in FY20. HCL shares are back at the pre-covid highs reached in February, which is similar to the trend for TCS shares. Infosys shares are now 13% higher compared to its pre-covid highs.