Strong deal wins will be key to HCL Tech’s revenue growth

Higher investments and muted growth in the products business can dent margins

Pegged back by muted showing in the products and platforms (P&P) space, HCL Technologies posted a lower-than-expected revenue growth performance in the March quarter. The constant currency sequential growth of 2.5 per cent was below the 3 per cent growth expected by the Street as the P&P segment (down 3.9 per cent) was impacted by seasonality and product rationalisation.

While the overall operating profit margin was down 554 basis points on a sequential basis, excluding the milestone incentives, margins were 250 basis points lower at 20.4 per cent. This was, however, better than the Street’s estimates. The fall in profitability was on account of wage hike, seasonality in revenues, fresh hiring/lower utilisation, and forex losses.

While the results were a mixed bag, analysts point out a few favourable trends from the revenue visibility and growth perspectives. The company reported its highest net new deal wins with a total contract value of $3.1 billion in the quarter, up 49 per cent YOY. For FY21, the deal value was up 18 per cent to $7.3 billion.

The deal wins were well diversified across segments with large deal wins, too, at robust levels, including two wins over $250 million and several $100 million deals. While the company did not quantify the range, it expects double-digit growth in revenues for FY22 with margins expected in the range of 19-21 per cent.

Two factors may be an overhang in the medium to long term. HDFC Securities highlights that recalibration of a few products in the P&P segment will dent growth; the company expects single-digit growth in FY22 from this segment. The other is the impact accelerated investments towards market expansion and scaling up of engineering, research and development will have on margins.

Devang Bhatt of ICICI Securities believes despite these headwinds, the company will easily surpass the top end of guided margins in FY22 due to rupee depreciation, lower travel cost, and operating leverage due to revenue growth. He expects margins to increase by 100 basis points over the FY21-23 period.

On the revenue growth front, the Street is positive given the order pipeline, higher pace of growth in the digital services segment, geographic expansion, and synergies between the services and product segments. Further, the valuation at just over 16x its FY23 earnings estimates should support the stock.