Why HCL Technologies’ stock fared better than its larger peers1 min read . Updated: 24 Oct 2019, 10:39 PM IST
- The company now expects its organic business to grow in double digits, at 10-11%, against 8-10% estimated earlier
- Deal flows have improved significantly compared with the June quarter
The September quarter earnings reinforced investors’ faith in the HCL Technologies Ltd stock. The stock gained 2.2% on Thursday, widening its recent outperformance against larger peers Tata Consultancy Services Ltd and Infosys Ltd.
Constant currency revenues jumped 20.5% as HCL Tech 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 its 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. “This revision in guidance comes on the back of acceleration in organic growth momentum in H1, robust deal wins, and order book," analysts at SBICAP Securities Ltd said in a note.
Deal flows have improved significantly compared with the June quarter. The company signed 15 transformational deals. Overall caution in the financial services industry notwithstanding, HCL Tech has a good deal pipeline in Europe. Four of the seven business verticals clocked double-digit revenue growth in Q2.
The newly formed products and platforms division (HCL Software) had a good start, clocking $100 million in revenue. Created after integrating IBM products, it has access to 20,000 customers across the globe. The management expects the enhanced reach to aid business momentum.
Operating profit margin jumped to a multi-quarter high of 20% in Q2. Margins were boosted by lower amortization expenses and full recognition of revenues from IBM products, expenses of which were partly booked in earlier quarters.
Predictably, investors cheered the results. How well HCL Tech is able to narrow the valuation gap with peers depends on its ability to scale up the products business and revenue momentum. “HCL Software’s (products unit) ability to successfully convert IBM customers into its own fold over the next few quarters will be the key for further re-rating," said analysts at Centrum Institutional Research.