News Analysis

HCL Tech: Beats peers, confident of future

Rajalakshmi Nirmal BL Research Bureau | Updated on January 11, 2018 Published on May 11, 2017
HCL Technologies saw an exit of 536 employees during the September quarter

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Sees big opportunities for its Mode 2,Mode 3 services

HCL Technologies has reported an outstanding set of numbers for the March 2017 quarter.

The sequential revenue growth in constant currency terms was 3.8 per cent (4.1 per cent in dollar terms). The company’s peers- Infosys, TCS and Wipro reported revenue growth of 0 - 1.7 per cent in constant currency in the March quarter.

While revenue from Europe dropped by 3 per cent, it was more than offset by growth in revenues from the US and other regions. US revenues recorded a growth of 5.3 per cent in constant currency terms during the March 2017 quarter. This is the strongest growth any large IT services company saw in the March 2017 quarter in the US geography. For TCS, while the US revenues declined, for Infosys, it was a lacklustre growth of 1.2 per cent.

HCL Tech managed to add one new client each in the $50 million and $30 million plus bucket. It also added 5 clients each in $10 million and $5 million plus buckets, respectively. The company showed better client mining skills too. Revenue from top five clients increased to 14.7 per cent in the March 2017 quarter, up from 14.2 per cent in the December 2016 quarter and 13.6 per cent in the same quarter previous year.

Among service lines, the engineering business grew the strongest. It grew by a strong 14.6 per cent sequentially on constant currency terms in the March 2017 quarter compensating for a lower growth in Infrastructure (up 0.9 per cent) and Business (0.2 per cent) services.

Operating profit margin dropped by 20 basis point sequentially in the March quarter. However, it did expand for the full year. For 2016-17, the margin stood at 22.1 per cent, up from 21.5 per cent in the previous year. The company’s management said its DryICE automation platform had helped in saving costs in fixed price projects.

Full-year performance

HCL Tech has recorded a better show than both its peers – Infosys and TCS, for the full year.

In 2016-17, the company’s revenue grew by 13.7 per cent (in constant currency terms). TCS and Infosys recorded a revenue growth of 8.3 per cent.

HCL Tech’s performance was buttressed by strong growth across services and verticals. The company’s ‘Mode 2’ (next generation services including digital, analytics, IOT, Cyber Security and others) and ‘Mode 3’ (future products and services) offerings together recorded a growth of 30.9 per cent in 2016-17, year-on-year. Among service lines, but for business services, others grew strongly. The infrastructure services recorded a 27.4 per cent growth and Engineering Services a growth of 11.7 per cent.

The company’s strong capabilities in the IMS and engineering space, may continue to work to its advantage given that the demand is strong in these businesses.

Outlook

HCL Tech’s management sounds confident about demand in 2017-18, indicating large opportunities for its Mode 2 and Mode 3 services. The company’s has guided for a revenue growth of 10.5-12.5 per cent. With respect to the US geography, the company indicated that the visa issues may not be a big hindrance for its business. The company has 12 offshore centres in the US with about 12,000 employees working. Over 50 per cent of these employees are US locals.

With TCS and Infosys having indicated a slower growth in 2017-18, there is a possibility that HCL Tech’s stock may see some re-rating in the market in coming days for its not so bad guidance. It may see the valuation gap with the larger peers narrow down. While HCL Tech trades at about 13 times its estimated earnings for 2017-18, TCS and Infosys trade at about 17-15 times.

Published on May 11, 2017
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