Of the three IT companies that have reported second quarter results so far, only one — HCL Technologies Ltd — seems to have impressed the Street.
HCL Tech shares rose 2.7% today at Rs 1,257, responding to the company’s quarterly results, while those of TCS and Infosys reacted negatively to their respective results.
Overall, analysts seemed to prefer the commentary given by HCL Tech’s management over those of the others.
“Unlike peers, HCLT sounded confident of a better second half, though it flagged a still volatile
demand environment,” noted analysts from JM Financials.
The company pulled most levers — utilisation, productivity, sub-contracting and ‘other’ expenses — to improve its performance for the quarter, it added.
Record TCV deals to improve margins
HCL has hit a new milestone with a record total contract value (TCV) of US$4 billion, which is expected to commence in 2HFY24 and accelerate revenue growth.
During August 2023, HCLT announced a mega deal win with Verizon. The deal is entirely net-new and has TCV of USD 2.1 billion over a 6-year tenure.
The management’s confidence in the ramp-up of the Verizon deal, the seasonal uptick in the products and platforms business in the third quarter, and strong bookings in the preceding quarter was widely welcomed amongst the analysts.
The deal involves the transition of work from existing vendors and shifting some part of in-house spending.
“This implies a solid quarterly run rate in 2HFY24, which we expect to be the best among our Tier 1 IT services coverage. We expect this to support the share price despite the near-term weakness,” said analysts from Motilal Oswal.
The analysts maintained ‘BUY’ rating on the stocks.
However, the street was not happy with the company's guidance cut — which was also as expected— to 4-5% from 6-8%.
“Even the revised guidance seems aggressive at the upper end of the band,” noted analysts from Kotak Institutional Equities.
Despite being heavily skewed towards cost takeout deals, the company's deal pipeline is robust, and it is expected to benefit from vendor consolidation initiatives and cost optimization deals.
“The company’s deal pipeline remains at healthy levels (marginally lower from the peak), even after strong conversion during the quarter,” noted Kotak Institutional Equities.
“Deal wins and healthy levels of pipeline provide comfort on improved revenue growth in FY2025E. However, an uptick in discretionary spends is required to meet expectations of double-digit revenue growth in FY2025E,” it added.
Improvements in EBIT margins
Like the other two, the EBIT margin for HCL also witnessed a significant QoQ improvement at 1.5%, reaching 18.5%, which surpassed the estimated margin by 0.8%, noted JM Financial.
The company attributed this improvement to the strong cost-control measures implemented in the first half of the year and the optimization of the employee pyramid.
Additionally, it reported a net reduction in headcount for the second consecutive quarter, which, along with the optimization of subcontracting expenses, contributed significantly to the margin improvement. With this impressive margin outperformance, HCLT remains confident in achieving its margin guidance of 18-19%.
“HCLT’s margin guidance (18-19%) is more defendable as growth picks up in 2H, in our view,” said JM Financial.
“This places HCLT’s growth at the top-end of peer set,” it added.
No increments
HCL's decision to forgo management-level increments, which constitute a significant portion of the company's wage bill, is expected to assist in enhancing profitability in the short term.
Analysts from Motilal Oswal also anticipate that robust revenue growth and continued cost-control measures in the second half of the year will provide operational leverage and support overall margin improvement.