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Business News/ Markets / Mark To Market/  Q2 results explain why HCL Tech stock has fared better than its larger peers
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Q2 results explain why HCL Tech stock has fared better than its larger peers

The stock gained 7.6% from its June-quarter results even as concerns about acceleration in revenue growth rates began undermining shares of larger peers
  • While the NSE IT index fell 4%, shares of TCS and Infosys lost 6-16% from HCL’s June-quarter results
  • Deal flows improved significantly from the June quarter (Mint file)Premium
    Deal flows improved significantly from the June quarter (Mint file)

    The September quarter results of HCL Technologies Ltd will reinforce investors’ faith in the stock. The stock has gained 7.6% since its June quarter results even as concerns over acceleration in revenue growth rates undermined shares of its larger peers. While the NSE IT index fell 4%, shares of TCS Ltd and Infosys Ltd have lost 6-16% since HCL announced its April-June earnings in the first week of August. On Thursday, HCL Tech shares gained another 4.5% in early trades.

    In the September quarter, revenue in constant currency jumped 20.5% as HCL began integrating acquisition of select IBM products. On a sequential basis, revenue grew 6%. Much of the sequential growth was driven by the integration of IBM products. Even so, a 14% expansion in organic revenue from a year ago is nothing to sneeze at.

    More importantly, the upgrade in annual revenue growth guidance underscores the improvement in core business. The company now expects its organic business to grow in double digits at 10-11% against 8-10% estimated earlier.

    In constant currency terms, the full-year revenue growth guidance has been raised by one percentage point to 15-17%. Last fiscal, constant currency revenue grew 11.8%. “This revision in guidance comes on the back of acceleration in organic growth momentum in H1, robust deal wins, and order book, even as the company faces renewal pressure in the IMS (infrastructure management services) business," analysts at SBICAP Securities Ltd said in a note.

    The revenue guidance upgrade will please investors. Also, the company has been witnessing a good deal-winning momentum.

    Deal flows have improved significantly compared with the June quarter. The company signed 15 transformational deals and added a $100 million client in July-September. Overall caution about banking and financial services business vertical notwithstanding, the company has a good deal pipeline in Europe. Four of the seven business verticals clocked double digit revenue growth last quarter.

    The newly formed products and platforms (HCL Software) also got to a good start clocking $100 million of revenues. The platform created after integrating IBM products gives access to 20,000 customers across the globe. The management expects the enhanced reach to aid business momentum.

    Operating profit margins jumped to multi-quarter high of 20% in July-September. Margins were boosted by lower amortization expenses and full recognition of revenues from IBM products, expenses of which are partly booked in earlier quarters. Margins may moderate as revenue flow from acquisitions normalize. The management expects full-year profit margins in a range of 18.5-19.5%.

    The performance will add heft to HCL’s valuations. How well the company will be able to narrow the valuation gap with larger peers depends on its ability to scale up the products business and maintain revenue momentum. “HCL Software (Products unit) ability to successfully convert IBM customers into its own fold over the next few quarters would be the key for further re-rating," analysts at Centrum Institutional Research said in a note.

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    Published: 24 Oct 2019, 08:54 AM IST
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