HCL Tech surprises Street with strong revenue growth outlook

Rise in demand likely with higher anticipated IT spends across sectors, say experts

Led by HCL Technologies, the BSE Information Technology index was the biggest gainer among sectoral indices, ending 4.76 per cent higher on Monday. HCL Technologies was up over 10 per cent after it put out a positive mid-quarter update and this rubbed off on other large-cap stocks such as Tata Consultancy Services and Wipro, which closed with gains of 5 per cent each.

The rally was not limited to large caps. Persistent Systems, which gained 14 per cent, was the highest gainer in the mid- and small-cap space. In fact, stocks outside the Big 5 outperformed their larger peers both on upgrade expectations and increased inflows from fund houses. Securities and Exchange Board of India (Sebi) guidelines that mandate that multi-caps are required to have a minimum exposure of 25 per cent each to mid- and smallcap stocks spurred the rally.

However, the biggest talking point was HCL Technologies’ update, which pegged revenue growth at over 3.5 per cent on a sequential basis on the back of broad-based momentum across service lines, verticals and geographies.

Deal booking has been strong in the September quarter, led by life sciences and healthcare, telecom and media, and the financial services segments.

“We expect the revenue and operating margin for the current quarter (September) to be meaningfully better than the top end of the guidance we had provided in July,” it said in an exchange filing on Monday. It has also bumped up its operating margin guidance to 20.5-21 per cent for the quarter.

The update was a surprise for the Street as just a couple of months ago HCL Tech, which had posted a revenue decline of over 7 per cent in the June quarter, had guided for a 1.5-2.5 per cent growth in revenues for the remaining quarters of FY21. Margin guidance was in the 19.5-20.5 per cent range.

Analysts expect the momentum to continue. Says Amit Chandra of HDFC Securities: “Demand recovery has been faster than expected. This coupled with vendor consolidation, especially tier-3 vendors, deal wins, and execution in the current environment has helped the larger vendors.”

Given the falling travel costs and improving sales efficiency, lower variable costs (no salary hikes), higher offshoring and demand growth, brokerages believe margins will remain strong. Higher operating leverage is expected to more than offset headwinds on the currency front. What will keep sentiment for large-cap IT stocks strong are higher payouts. Says Suyog Kulkarni of Reliance Securities: “In addition to deal wins and margin recovery, capital allocation policy (higher dividends and buyback) will be key triggers for HCL Technologies and IT sector.”

Most experts say spending by clients has become more broad-based unlike the past, where it was limited to large companies in the banking and financial services and retail sectors. Says an analyst at a domestic brokerage, “Digital has become the core part of the spends and is no longer discretionary and companies now perceive it as a business enabler and not just a back-end support system as was the case with implementation of enterprise resource planning and integration projects.”

While large-caps will be in demand, analysts believe mid-caps will also see traction and better revenue growth, given attractive pricing on projects, niche positioning, lower base and market share gains.