September quarter (2Q) results and outlook from HCL Technologies came in better than expected on most metrics, and may provide some cheer for investors. In July, at the time of Q1 results, the company CEO had said he was more bullish on demand then than in April. Not everyone was convinced then. However, his expectations appear to have played out well in 2Q.

While revenue was 1 per cent above consensus (Bloomberg), revenue growth in constant currency (cc) terms was also good at 15.8 per cent Y-o-Y.  The company surprised on profitability with operating profit coming in 3 per cent above expectations. Operating margin at 18 per cent was above expectations of 17.5 per cent and a decent improvement over the 17 per cent reported in Q1. Another reason results will be viewed positively is that some analysts were sceptical on company’s ability to improve operating margins after Q1 results due to upcoming wage hikes, but company has surprised on the positive side in this aspect.

With regard to outlook, the company increased FY23 revenue growth guidance to cc growth of 13.5 to 14.5 per cent versus 12-14 per cent earlier. EBIT margin guidance for the year is now at 18-19 per cent versus the earlier outlook of 18-20 per cent. While this lowers the mid-point, the company had already indicated last quarter that it expects to come in at the lower end of the range.

Management commentary was positive with strong growth witnessed across geographies (including Europe which is mired in deeper macro economic issues) and verticals. Deal wins traction was also decent. In a broadly good report, a point of concern may be the employee attrition at 23.8 per cent, which remains high and was flattish Q-o-Q.

Investor takeaways

HCL Technologies trades at a one-year forward PE of 17.2 times. In our bl.portfolio edition dated September 4, 2022, we had recommended an ‘accumulate’ on HCL Technologies given its comparably better performance with peers, but yet at a discount to their valuations. Its discounted valuation and trailing dividend yield of around 5 per cent (best amongst peers) offered better margins of safety as compared to peers. While 2Q results may provide some potential for a modest re-rating, investors can look to accumulate the stocks on dips, rather buy in one go. This is based on the possibility that as long as global macro issues loom, risks of speed bumps  to business in the medium-term remain.

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