Stock corner: ‘Hold’ HCL Technologies, results were largely in line with estimates

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Published: October 29, 2019 12:02:19 AM

HCL Tech's revenue growth of 6% q-o-q cc was lower than our estimate of 7.1% due to lower revenue recognition from IBM acquisition due to accounting factors.

HCL Tech’s Q2 revenue growth of 6% q-o-q cc was below our estimate of 7.2% on account of lower revenue recognition from IBM product acquisition of 0 mnHCL Tech’s Q2 revenue growth of 6% q-o-q cc was below our estimate of 7.2% on account of lower revenue recognition from IBM product acquisition of 0 mn

HCL Tech’s revenue growth of 6% q-o-q cc was lower than our estimate of 7.1% due to lower revenue recognition from IBM acquisition due to accounting factors. Amortisation was also much lower which led to 7% beat in Ebit though Ebitda was in line. Revenue guidance was raised to 15-17% y-o-y cc vs. 14-16% earlier but this is not surprising given conservative guidance earlier. Margin guidance remains unchanged at 18.5-19.5%. 1:1 bonus issue has been announced.

Revenue, margin largely in line adjusted for accounting differences in IBM acquisition impact
HCL Tech’s Q2 revenue growth of 6% q-o-q cc was below our estimate of 7.2% on account of lower revenue recognition from IBM product acquisition of $100 mn (vs. estimate of $140 mn); organic growth appears to have been slightly ahead at 1.8% q-o-q. While Ebit margin was well ahead at 20% vs. our estimate of 18.5%, most of the impact again appears to have been on account of lower amortisation impact than expected from IBM acquisition. The company indicated that quarterly run-rate of amortisation on account of IBM products will be $16 mn higher in 2H.

Revenue guidance raised, along expected lines
HCL Tech raised its revenue growth guidance to 15-17% (13.2-15.2% in USD terms) vs. 14-16% earlier but this was along expected lines given the previous guidance seemed to conservative – the company has achieved 18.8% y-o-y cc growth in 1H. Margin guidance was maintained at 18.5-19.5%. The company also announced a 1:1 bonus issue.

Earnings call takeaways
Management indicated good bookings in Q2 despite macro, though pipeline is marginally lower compared to Q1 end. The SG&A expense was more normalised in Q2 while there was a one-off in Q1. Q-o-Q Ebit margin change of 290bps was due to +110bps IBM acquisition, + 210bps productivity benefit & other factors partly offset by various other factors (-20bps).

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