 "HCL Tech Q1 better than peers")
HCL Technologies, the fourth-largest IT (information technology) services firm, not only beat estimates with its June quarter (Q1) results but also surprised the Street with a full-year revenue growth forecast not only sector-leading but also coming after a gap of 12 years.
The numbers also point to the continued polarisation (divergence in terms of performance) among top IT services firms. For instance, HCL Tech’s revenue growth forecast (11.2-13.2 per cent in $ terms on constant currency basis) not only beat Nasscom’s sector growth estimates of 10-12 per cent but also Infosys’s (the country’s second-largest IT services provider) forecast of 10.8 to 12.3 per cent.
The Street was surprised, evident from the stock performance. HCL Tech's stock jumped almost eight per cent intra-day, before closing with 3.2 per cent gains at Rs 826 on Wednesday.
HCL Tech's net profit for the quarter at Rs 2,047 crore was up 14.8 per cent year-on-year and 6.3 per cent sequentially. Revenue grew almost 16 per cent year-on-year and eight per cent quarter-on-quarter to Rs 11,336 crore.
In dollar (constant currency) terms, HCL Tech reported a revenue growth of 6.5 per cent ($1,691 million), one of the strongest growth rates among its peers so far. These numbers for the company come after almost three quarters of subdued performance.
"Though the IT infrastructure business is the growth driver for HCL Tech this quarter, it is core to the company's growth. From demand perspective, the top players are well-placed. What seems to be the problem is Brexit, which is slowing down execution," said Sarabjit Kaur Nangra, analyst from Angel Broking.
The polarisation also shows how each of the companies is dealing with the change that technology is throwing at them in the form of digital footprint and cloud computing. On the one hand, firms like Infosys and Wipro have chosen to acquire capabilities, on the other, Tata Consultancy Services (TCS) has focused on organic growth of new capabilities, and firms like HCL Tech have continued to acquire much more traditional businesses like Volvo's IT services arm and mid-cap firm Geometric.
The growth parameters for all top players also show their strategy focus. HCL Tech continued to see infrastructure services driving its growth, with 16.5 per cent sequential increase. When asked about the growth the company is seeing in digital revenue, the company management said the breakup is not available.
The numbers also point to the continued polarisation (divergence in terms of performance) among top IT services firms. For instance, HCL Tech’s revenue growth forecast (11.2-13.2 per cent in $ terms on constant currency basis) not only beat Nasscom’s sector growth estimates of 10-12 per cent but also Infosys’s (the country’s second-largest IT services provider) forecast of 10.8 to 12.3 per cent.
The Street was surprised, evident from the stock performance. HCL Tech's stock jumped almost eight per cent intra-day, before closing with 3.2 per cent gains at Rs 826 on Wednesday.
HCL Tech's net profit for the quarter at Rs 2,047 crore was up 14.8 per cent year-on-year and 6.3 per cent sequentially. Revenue grew almost 16 per cent year-on-year and eight per cent quarter-on-quarter to Rs 11,336 crore.
In dollar (constant currency) terms, HCL Tech reported a revenue growth of 6.5 per cent ($1,691 million), one of the strongest growth rates among its peers so far. These numbers for the company come after almost three quarters of subdued performance.
"Though the IT infrastructure business is the growth driver for HCL Tech this quarter, it is core to the company's growth. From demand perspective, the top players are well-placed. What seems to be the problem is Brexit, which is slowing down execution," said Sarabjit Kaur Nangra, analyst from Angel Broking.
The polarisation also shows how each of the companies is dealing with the change that technology is throwing at them in the form of digital footprint and cloud computing. On the one hand, firms like Infosys and Wipro have chosen to acquire capabilities, on the other, Tata Consultancy Services (TCS) has focused on organic growth of new capabilities, and firms like HCL Tech have continued to acquire much more traditional businesses like Volvo's IT services arm and mid-cap firm Geometric.
The growth parameters for all top players also show their strategy focus. HCL Tech continued to see infrastructure services driving its growth, with 16.5 per cent sequential increase. When asked about the growth the company is seeing in digital revenue, the company management said the breakup is not available.
Whereas both TCS and Infosys talked about the uptick in digital services, TCS maintained its revenue from digital services now constitutes 16 per cent. Similarly, Infosys which has been acquiring firms and investing in start-ups, said it is witnessing positive developments across focus initiatives such as Skava, Edge, Finnacle, and Mana (artificial intelligence tool). It is witnessing automation-led strong renewal of deals in the traditional space.
The other area where the polarisation is playing out is the margins.
TCS' Q1 numbers showed growth across verticals and geographies, but disappointed on margins front. Ebit (earnings before interest and tax) margin at 25.1 per cent was a disappointment, especially when TCS in the past has stated that it will maintain its margin in the 26-28 per cent band. This is perhaps one of the lowest-ever margins for the company since FY09.
Wipro's operating profit margin for the quarter came in at 23.8 per cent, one of the lowest in 18 quarters, hit by wage hikes, consolidation of certain acquisitions, and weak performance of a few geographies. HCL Technologies, however, managed to maintain its margin in the 20 per cent range.
The first quarter, which is traditionally a strong quarter for the sector, saw top firms reporting numbers that were softer than their previous performances.
Infosys cut its revenue growth forecast for the financial year and missed its revenue growth estimates for Q1. The company acknowledged that unanticipated headwinds in discretionary spending, in consulting services, and packaged implementations, as well as slower ramp-ups in large deals hit Q1 numbers. Vishal Sikka, chief executive, Infosys, acknowledged that Brexit will be a concern. Rather, Brexit uncertainties and low visibility were some of the reasons for the company to reduce its revenue growth targets for FY17.
For Wipro, which continued to miss estimates, it looks like the company's revival plan is still a long way to go. Though the management has stated it expects growth and margins to pick up in H2FY17, analysts believe there is still time for that to happen. Emkay's analysts said: "September quarter revenue growth forecast means Wipro will struggle to get to double-digit revenue growth in FY17 (our current revenue growth estimates at 10.5 per cent here)." The company expects to post dollar revenues of $1,931 million to $1,950 million in the September quarter, implying subdued sequential growth of 0.01 per cent to 0.99 per cent.
Though TCS managed to beat estimates, the top management sounded cautious about Brexit and its impact on its banking clients.
The polarisation in operation continues for the big four, but for FY17 the challenges for these firms will be common. Brexit, visa, and currency volatility will be the three headwinds that each will have to meet head-on.
