HCL Tech’s Best Second Quarter Forecast Reflects Strong Undercurrents in Tech Spending

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

The operating profit margin of 20.5% to 21.0% for the quarter is also above its guided range for fiscal 21 of 19.5% to 20.5%.

The stock gained 8% in Monday’s trade and leads Nifty 50 stock gains.

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The company was among the hardest hit by frontline IT companies during the June quarter. Dollar revenue fell 7.4% sequentially in the last quarter, larger than the 2-3% decline at Tata Consultancy Services Ltd (TCS), Infosys Ltd and Wipro Ltd. The sharp drop is expected to weigh on HCL’s annual revenues.

But a stronger recovery in the September quarter improves the chances that HCL will see noticeable revenue growth in FY21. “We built constant currency growth of 1.5% quarter on quarter and an EBIT margin of 20.1% for 2QFY21, which is therefore much better in terms of growth and margin. Also note that with constant currency being favorable for the second quarter, revenue growth in dollars for the second quarter of FY21 could be 4.8%, “says an analyst at a brokerage firm.” The company (can) now comfortably generate flat dollar income for the full year dollar income for FY21 previously modeled). “EBIT is earnings before interest and taxes.

As a result, HCL’s net income in the current quarter is likely to be 10% above consensus estimates, said an analyst at another brokerage firm.

This results in gains in HCL stocks. While HCL’s valuation discount to its larger peers TCS and Infosys also contributes to the gains, the comment also pushes up shares of other IT companies. TCS, Infosys, Wipro gained around 2-3%. All of them hit new 52-week highs in the past two months.

HCL’s mid-quarter update strengthens investor belief in IT stocks. Covid-19 brings a new sense of urgency among customers, especially fence guards, to transform and enhance their digital capabilities. In addition, massive fiscal and monetary support from the US and European governments helps customers maintain their technology spending.

Recent comments from corporate management reflect this. Most reported decent order wins and a healthy business pipeline.

In its recent interaction with Kotak Institutional Equities, Infosys indicated a strong pipeline of transactions and growing opportunities in new technologies. “Infosys reported that the impact of covid-19 has given a boost to cost reduction, cloud transformation and customer experience (customer experience), vendor consolidation and cybersecurity. Accelerated cloud adoption and improved customer experience have become essential components for businesses in their digital journeys. Modernizing legacy IT systems is essential to fully reap the benefits of transformation, ”Kotak said in a note.

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