HCL Tech’s better Q2 guidance reflects strong undercurrents in technology spends


HCL Technologies Ltd surprised the Street indicating stronger growth for the September quarter (Q2 FY21). The company now expects the sequential constant currency revenue growth to exceed 3.5% in the current quarter, higher than 1.5-2.5% guidance the company provided in July.

The operating profit margin guidance of 20.5-21.0% for the quarter is also higher than its FY21 guided range of 19.5-20.5%.

The stock gained 8% in Monday’s trade and is leading the gains in Nifty 50 shares.

The company was among the worst hit in frontline IT companies in the June quarter. Dollar revenue dropped 7.4% sequentially last quarter, higher than the 2-7.3% fall at Tata Consultancy Services Ltd (TCS), Infosys Ltd and Wipro Ltd. The sharp fall is expected to weigh on HCL’s full year revenue.

But a stronger recovery in the September quarter improves the chances of HCL clocking notable revenue growth in FY21. “We built 1.5% quarter-on-quarter constant currency growth and 20.1% EBIT margin for 2QFY21 and hence this is much better on both growth and margin. Also note as constant currency is tailwind for Q2, dollar revenue growth for 2QFY21 could be 4.8%,” says an analyst at a broking firm. “Company (can) now comfortably deliver flattish dollar revenues for full year FY21 (vs 2.8% decline in dollar revenues for FY21 modeled earlier).” EBIT is earnings before interest and tax.

Consequently HCL’s net earnings in current quarter will likely be 10% ahead of consensus estimates, points out an analyst at another brokerage firm.

This is driving gains in HCL stock. While HCL’s valuation discount to its larger peers TCS and Infosys is also aiding gains, the commentary is also lifting the shares of other IT companies. TCS, Infosys, Wipro gained in the range of 2-3%. All of them have hit new 52 week highs in the last two months.

HCL’s mid quarter update reinforces the investors’ belief in IT stocks. The covid-19 is bringing a new sense of urgency by clients, notably for the fence sitters, to transform and enhance their digital capabilities. Further, massive fiscal and monetary support by the US and European governments are helping clients maintain technology spends.

The recent management commentaries by companies reflect this. Most reported decent order wins and a healthy deal pipeline.

In its recent interaction with Kotak Institutional Equities, Infosys indicated a strong deal pipeline and growing opportunities in new technologies. “Infosys indicated that covid-19 impact has provided an impetus to cost takeout, cloud transformation and CX (customer experience), vendor consolidation and cybersecurity. Accelerated cloud adoption and improved CX have become critical components for organizations in their digital journeys. Modernizing legacy IT systems is critical to reap the full benefits of transformation,” Kotak said in a note.

News Source: livemint

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