HCL Tech's Q3 show slightly better than peers: Experts

Bhasin said the sector shouldn’t fear the new Donald Trump administration’s comments on visa curbs, saying it was all rhetoric and more bark than bite.

Girish Pai, Head of Research at Nirmal Bang Institutional Equities, said while the dollar revenue seemed to be a bit lower, the margins were better than expected and HCL’s growth appeared slightly superior to its peers.Below is the verbatim transcript of the interview.Anuj: HCL Technologies, good numbers, at least for the quarter gone by. What are your thoughts on the guidance and the fact that how much of this is in the price considering that the stock has been strong over the last say two months or three months? Bhasin: It has been an outperformer and it is a beat on all counts. Like you said, the margins were best been priced in at 19.5 percent; 20.5 percent is a beat there. I think the dollar revenue has also been better than expected and that is what reflected in the net profit. We also have to see that how the acquisition of Geometric and Butler plays out. However, given that we expected wage hikes to be inherently much more this quarter, I think the company has delivered on all performances. Also, the revenue guidance of 12-14 percent would stand good. However, on the other hand this has been an outperformer in a sector which has been underperforming. I think Rs 865-870 are prices where you will see a little bit of profit booking, but this definitely is headed towards Rs 1,000 in 2017. Latha: Reema was pointing out that the guidance has been maintained, but now they have added the expected revenues from Butler and the acquisitions. So, does it mean that there is a little bit of a doubt over the legacy revenues? Bhasin: HCL Technologies has always been a poor cousin compared to an Infosys and TCS and it trades at a lower multiple because of that. Given the way the company has performed in the last few quarters, I think it will reinforce confidence at least for the investors and yes, there will be a little bit of tinkering on how these acquisitions play out. However, coming from a case where Infosys, TCS, have all been very cautious on the US side, Europe rebounding means a lot of strength coming back into the company. So, we reiterate it has been one of our top picks aside from TCS. We reiterate an overweight and a buy on decline.Anuj: What are your first thoughts on HCL Technologies numbers? It has been a strong stock, so, we have to put that in perspective, what would be your first reaction?Pai: I think the constant currency (CC) growth number seems to be in-line with whatever is anticipating, 3 percent. The dollar revenue has come in slightly lower, I think probably the cross currency headwinds are probably stronger than what I was anticipating. Margins have been better than expected. We were expecting 19.7 percent margins and it has come in definitely higher than that. So, that is positive in one sense. However, beyond that, if I look at the guidance specifically for the year, I think one needs to hear from the management whether there is any inorganic component to it, if they are going to maintain the CC revenue growth at 12-14 percent without any inorganic element added to it then probably I would think that it is broadly in-line with what is expected. Latha: I wanted to ask you about the guidance yet again. As Reema was pointing out, the revenue growth guidance is retained at 12-14 percent but they also say that the acquisitions and the IP led partnerships announced after September 30 are likely to contribute an additional 0.6-1 percent in the revenues. This clearly was not there as Reema was pointing out when they gave the same guidance last quarter. So, should we assume that the legacy business, the older businesses, if the acquisitions had not been there, would have been guided lower?Pai: Absolutely. If that is the case -- I haven’t had a proper look at the press release but if that is the case that there is an addition of about a 1 percentage point in terms of revenue from acquisitions, then obviously that is a negative turn of events which means that the organic growth that they were expecting or the growth organic plus whatever else they were expecting, is not at levels that they were expecting at the beginning of the year. So, to that extent, I think it is a bit of a negative. One of my issues with HCL Tech has been that this is a company which is probably going to grow organically at say mid-single digits. Both in FY17 and FY18 there is a very large I would think inorganic component to it. I would think the Volvo deal in my opinion is going to add about half of the growth that the company is going to show in FY17. Next year there is going to be the Geometric software acquisition that is going to get added, there is going to be more of Butler and I think there is this IP acquisition that has been done. There is going to be revenue from that. So, I would probably think that organic growth for the company is probably somewhere in the region of 6-7 percent and the additions is what is taking it above the double digit level in one sense. So, that is where my concerns are with respect to HCL Technologies. So, I have a sell on the stock with target price of Rs 718 at this point in time; we will have to review the numbers post the Q3 call and I have to look through the data specifically.Sonia: How would you read into these numbers? A lot of plus points with the constant currency growth good, margin guidance maintained, margins better than what the street expected, but given that the stock has outperformed the rest of the IT space, do you expect this outperformance to continue? Taurani: The numbers are good. If you see, the revenue growth has been excellent. The margin has also been expanding. It is better than most of the largecap peers. Outperformance has been there by HCL Technologies and going ahead also we expect the stock to outperform. This is one of our top picks in the largecap IT space and even if there is a cut of 0.5-1 percent because of this inorganic growth which we just pointed out, still HCL Technologies will grow higher than peers in the largecap IT space. So, we have a buy recommendation with a target price of Rs 1,000.