Investor hopes from Indian IT rise after HCL Tech’s earnings update

Stocks of IT services companies got a boost after HCL Technologies Ltd surprised the Street with its pre-quarter earnings update. The $9.9 billion IT major said it expects revenues to grow by over 3.5% in the second quarter, higher than the 1.5-2.5% growth it had projected in July. What’s more, operating profit margins are now estimated to be about 100 basis points above its earlier target.

HCL’s shares jumped by over 10%, and the company’s better prospects raised hopes of an improvement in the entire industry’s performance in Q2. The Nifty IT index rose 4.7% on Monday, making it the biggest gainer among sectoral indices on the NSE.

While there were indications that demand for technology services was improving, from an investor’s perspective, there’s nothing like hearing it from the horse’s mouth.

“In a B2B business, we get a fair idea of the growth trajectory only when a company quantifies it. Interactions with companies and industry analysts all provide perspective, but HCL’s Q2 update specifically points to a faster recovery. This bodes well for other IT companies as well,” says an analyst at a multinational brokerage, requesting anonymity.

“Q2 is the first full quarter of business after covid-19 disrupted operations in Q1. In this backdrop, the recovery is fast and strong; other companies also should reflect this,” says Nitin Padmanabhan, analyst at Investec Capital Services (India).

The massive fiscal and monetary stimulus worldwide is mitigating the impact of covid-19 on US banks’ earnings, which is helping them maintain technology spends. Digital banking channels are seeing a surge in usage, and this is driving technology spending as well. The cost savings potential from the shift from physical to digital channels is also aiding technology spends, say analysts at Nomura Research.

HCL was among the worst hit in the June quarter. Dollar revenue dropped 7.4% sequentially last quarter, higher than the 2-7.3% fall at TCS, Infosys Ltd and Wipro Ltd.

But expectations for FY21 are being reset now. Faster revenue growth and better operating profit margin mean HCL’s net earnings in the current quarter can be 10% ahead of consensus estimates, says an analyst.

“HCL can comfortably deliver flattish dollar revenues for FY21 (vs 2.8% decline in dollar revenues for FY21 we modelled earlier),” says another analyst on condition of anonymity.

“How the upcoming quarters, say growth in Q4 FY21, will pan out will be dependent on actual order wins. Obviously the US elections are coming up and one can expect a bit of volatility in demand trends,” adds Padmanabhan of Investec.

While the optimism is helping IT stocks, rupee appreciation, fresh restrictions on US visas and prolonged curbs on international travel can crimp long-term growth opportunity for Indian IT firms.

For now, the strong earnings upgrades are expected to keep investors’ excitement levels high