HCL Technologies has scope for raising growth guidance, say experts

HCL Technologies (HCLT) has the scope for revising its revenue growth guidance upwards in the current financial year on the back of strong momentum in the large-deal space, apart from good growth in the engineering services segment. For FY20, HCLT has guided for revenue growth of 14-16 per cent in constant currency terms, which is the highest among the top-tier domestic IT firms.

Industry experts said the revenue flow from IP (intellectual property) deals with IBM will supplement the growth trend. Analysts who held meetings with the management of HCLT in the recent past also noted that the company is confident of maintaining the growth momentum in IMS (Infrastructure Management Services), which has seen disruption in recent years.

“HCLT is confident of its ability to continue winning mega deals on a regular basis. Strong deal wins in earlier quarters will drive organic revenue growth in FY20,” research analysts Aniket Pande and Rajat Gandhi of Prabhudas Lilladher wrote in a report. For the current financial year, HCLT is likely to deliver industry leading organic growth of around 11 per cent, the report said.  

The Noida-based IT firm, which had bagged 12 large deals in the June quarter, witnessed strong organic growth in the past three quarters, mainly due to ramping up of contracts with Nokia, Broadcom and Xerox. Apart from winning large outsourcing contracts, revenues from HCLT’s recent IP deal with IBM will start flowing this quarter. With an annual run rate of $650 million, the second quarter itself will see an addition of $125 million in revenues. “While revenues from IP deals will start flowing from this quarter onwards, the bigger share of the engineering services segment puts the firm in good stead among its peers,” said Pareekh Jain, an IT outsourcing advisor and founder of Pareekh Consulting.

The Shiv Nadar-promoted firm draws $2 billion in revenues (on the run-rate basis) from its engineering and R&D practice, which is the largest among its Indian peers. 

Despite these positives, HCLT is likely to see a tepid performance in its BFSI (banking, financial services and insurance) vertical. The financial services vertical accounted for 20 per cent of HCLT’s revenue in Q1 of FY20, and posted marginal growth of 0.5 per cent quarter-on-quarter. Similarly, the rising SG&A (selling, general and administrative) expenses eating into its margin remained another area of concern, experts said. However, the HCLT is confident of meeting its margin guidance range of 18.5-19.5 per cent. “Margins will be aided by contribution from IBM products acquisition, which has a higher margin of 30 per cent,” the Prabhudas Lilladher report said.

With 17 per cent constant currency revenue growth, HCLT had posted the sharpest revenue growth in the last quarter compared to its larger peers, such as Tata Consultancy Services (a rise of 10.6 per cent) and Infosys (a 12.4 per cent jump).

In the driver’s seat
  • The current revenue growth guidance of 14-16% for FY20 is seen as conservative
  • Large deals, revenue flow from IP deals to supplement top line this financial year
  • Despite headwinds, the company is confident of meeting margin guidance
  • The rising SG&A and the softness in the BFSI vertical seen as key risks

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