News Analysis

Though HCL Tech results miss expectations, underlying momentum remains strong

Hari Viswanath | Updated on October 18, 2021

New payout ratio of 75 per cent should help bridge valuation gap with Infosys, TCS over long-term

The HCL Technologies (HCL) stock is down 2.7 per cent in trading today after reporting lower than expected revenue and EBIT numbers in the September quarter. Results were announced after market hours on Thursday. Revenue of Rs 20,655 crore and EBIT of Rs 3,916 crore were approximately 1.5 and 3.5 per cent below consensus expectations (Bloomberg).

The revenue miss and the lower than expected operating margins which resulted in a higher EBIT miss, were primarily driven by the company’s differentiated products and platforms segment revenue (12 per cent of total revenues), declining by 5.5 per cent year on year (Y-o-Y).

According to the management, there is some seasonality attached to this business and recovery is expected going forward. This was reflected in the company reaffirming its prior FY22 outlook of double digit revenue growth in constant currency (cc) and EBIT margin of 19-21 per cent.

The company’s cc revenue growth (Y-O-Y) in the September quarter was at 10.5 per cent. This is lower than the 15 per cent and 19 per cent reported by TCS and Infosys, respectively. However, it needs to be noted that while Infosys was a clear outperformer last year, as compared to TCS, HCL’s growth is tempered by base effect. In the September quarter of last year, cc revenue of TCS de-grew by 3.2 per cent Y-o-Y, while it was flat for HCL.

Underlying momentum strong

The company saw a good traction in deal wins in the second quarter with Y-o-Y growth of 38 per cent, reflecting strong demand. Excluding the products and platforms segment, the company saw strong CC growth of 13 per cent. Similar to its peers, growth is broad-based and good across verticals and geographies. Cash conversion metrics remain strong and the operating cash flows at 117 per cent of net income was better than that reported by its peers.

Payout ratio

The company has announced a new payout ratio that entails investor payouts of not less than 75 per cent of net income cumulatively over 5 years (FY22-26). This now brings it to levels comparable with peers such as TCS and Infosys in terms of capital returns, and should help bridge some of the valuation gap between HCL and these companies over the long-term


It trades at 23 times next twelve months (NTM) EPS, which is a 57 per cent premium to its 5-year average. Some of the premium is warranted, given the rerating the stock deserves for its decent performance in recent years. The new payout policy also supports rerating. Given its performance, its valuation compares favourably versus its peers (TCS, Infosys and Wipro), which are trading in the range of 30-32 x NTM EPS. Investors can hold the stock.

A few factors that long-term investors need to look out for are a slowdown in the US economy going forward, and how the rupee performs versus the dollar over the next year. The rupee has traded within a broad range since the Covid lows of last year April/March. A long-term annual depreciation of 3-4 per cent is likely required to ensure margins for IT services companies remain stable/ improve in the medium to long term.

Published on October 18, 2021

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