HCL Q3: A sound delivery across verticals, geographies

HCL Technologies reported better than expected results with revenue approximately 1 per cent above consensus estimates (S&P Capital IQ).

While headline EPS was 20 per cent above estimates, 50 per cent of this was due to one-time tax benefits. At the EBIT margin level, the beat was around 9 per cent.

The company achieved a milestone of crossing $10 billion in revenue in CY 20. Constant currency (cc) revenue growth was up 3.5 per cent sequentially (vs Infosys at 5.3 per cent, TCS at 4.1 per cent, Wipro at 3.4 per cent). On a year-on-year basis, HCL’s cc growth was at 1.1 per cent (vs Infosys at 6.6 per cent, TCS at 0.4 per cent and Wipro minus 2 per cent).

HCL also increased its outlook for sequential revenue growth in Q4 FY21 to around 2.5 per cent vis-à-vis its earlier guidance of around 2 per cent. The EBIT margin outlook for FY21 was increased to 21.25 per cent vs prior 20.5 per cent.

The company saw strength across verticals and geographies. Five out of seven verticals saw growth sequentially while one was marginally down and another flattish. Within geographies, the company saw strong growth in Europe, followed by the Americas. Its growth in the rest of the world was down, driven by base effect, as it saw strong growth in that segment in the last quarter.

Digital and cloud demand continued to drive revenue growth. HCL is also benefiting from its differentiated ‘Products and Platforms’ strategy (14 per cent of revenue).

With good traction in licensing deals, it has validated the company’s expansion in this space with the acquisition of certain IBM products for $1.8 billion in a deal concluded in July 2019.

Broadly, all the Big Four IT companies have delivered well. TCS has shown strength in size and industry-leading margins, Infosys in its better growth rate, Wipro in improving its margins to 22-quarter highs, and HCL with its differentiated strategy.

Operational excellence

The firms have also shown excellence in the way they seamlessly managed operations despite the various disruptions caused by Covid-19.

Digital and cloud demand trends appear strong over the next few years and, a few years down the line, 5G use cases and the tech/digital demand it will unleash will provide another opportunity for the IT services sector.

However, one needs to note that IT services is not a high-growth industry. Hence, the rally seen in IT services stocks over the last year leaves little value on the table for a new investor.

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