News Analysis

Outlook remains positive for HCL Tech despite Q1 results coming below expectations

Hari Viswanath BL Research Bureau | Updated on July 20, 2021

Broader business momentum offset Q1 miss

HCL Technologies reported results marginally below expectations after market close on Monday. This is reflecting in the stock trading down by around 2 per cent currently.

Revenue of ₹20,068 crore and adjusted EPS of ₹11.8 were around 1 per cent below consensus estimates (Bloomberg). Operating margin of 19.6 per cent missed expectations which were around 20.5 per cent. Q1 miss notwithstanding, management sounded confident of momentum improving going ahead. The company has guided for revenue to grow in double digit in constant currency (CC) for FY22 and operating margins to be in the range of 19-21 per cent, both generally in line with expectations.

For the quarter, revenue in constant currency was up 11.7 per cent YoY (versus Infosys which was up 16.9 per cent and TCS, 16.4 per cent). For all the companies, the YoY growth comes with benefits of base effect due to Covid impact on business in Q1 last year. Operating metrics were good. The company saw broad-based growth across geographies and verticals on YoY basis. While there was a sequential decline in Europe (approx. 30 per cent of revenue from that region), according to management this is not of concern. As per their clarification, this was due to timelines related to a large deal transition and the bookings and pipelines remain strong for the region. While the 37 per cent increase in new deal wins Y-o-Y is lower than that of Q4FY21, according to management, this is seasonal. Cash flows have been good with operating cash flows at 102 per cent of net income and free cash flow at 93 per cent of net income.

Valuation

HCL Technologies currently trades at one year forward PE of 19 times (Bloomberg), versus 5 year average of 14.3 times. The current 32 per cent premium to its historical average appears reasonable given the company traded at a higher than warranted discounted valuation versus peers in the past. Strong balance sheet with net cash at around 5 per cent of market cap, strong cash conversion/generation and FY21-23 EPS CAGR expected in low double digits, provide support to its current valuation. While Q1 missed expectations, it does not change much as far as long-term prospects of the company is concerned. Investors can continue to hold the stock.

Published on July 20, 2021

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