HCL Tech impresses Street, unlike peers TCS, Infosys

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.