IMPROVING OUTLOOK TO SUPPORT HCL TECH’S STOCK

Valuations are attractive

Despite weak revenue performance, HCL Technologies reported a healthy margin profile for the June quarter. While revenues were down 7.2 per cent on a sequential basis because of the Covid19 pandemic, supply constraints and offshoring of large deals, the company managed to post steady margins at 20.5 per cent. This was slightly lower than the 20.9 per cent posted in the March quarter, and was led by gains from offshoring to low-cost destinations, change in business mix, and improving cost efficiencies.

The company indicated that the worst was behind and demand remains strong, led by digitisation and clients’ need for cost optimisation. Some of this was reflected in the 11 new deals the company signed in the quarter. The deal pipeline is also 40 per cent higher than the year-ago levels.

While there is pressure on asset heavy sectors such as auto and aerospace, t he company believes that financial services, telecom and technology demand is improving, led by digital initiatives and cloud adoption. Financial services, manufacturing, technology & services are the biggest verticals for HCL Tech, accounting for around 60 per cent of revenues.

The company has guided for an average growth of 1.52.5 per cent sequentially on a constant currency basis over the next three quarters. At the lower end of the guidance, this would mean a 3 per cent fall in revenues for financial year 2020 -21 and flat performance at the upper end. While this is lower than the 0-2 per cent guidance of Infosys, the 19.5-20.5 per cent margin guidance is positive. Further, with growth returning and healthy cash collections, analysts expect a buyback or inorganic expansion.

Though the stock could come under pressure in the near term after the 54 per cent rise since March lows, analysts believe sharp downsides are unlikely. The stock is trading at a 35 per cent valuation discount to Infosys, which is more than the 20 per cent discount it has traded at historically.