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For investors worried about AI's deflationary impact on IT services and the uncertain global macroeconomic environment, the latest quarterly results of HCL Technologies should come as a relief. Revenue growth exceeded the Street's expectations and the company raised the lower end of its revenue growth guidance for the core IT services business.
Importantly, September quarter results show that HCL is coping well with technological changes taking place in the industry. The company called out revenues of $100 million from advanced AI services, constituting 3 percent of total revenues.
However, the deflationary impact of new technologies is visible in the business. Even then, HCL is willing to disrupt a part of its existing business to retain clients and gain new business. The strategy is yielding decent results. Project pipeline is strong and the company saw good bookings of new orders in the September quarter.
“While there are some concerns about the long-term trajectory of the industry, we feel there is and will be a huge tech services market,” C Vijayakumar, chief executive officer and managing director of HCL Technologies, said in a post-results earnings call. “This AI wave would create big winners and those winners would benefit big over the long term.”
HCL’s results are markedly better than that of industry leader Tata Consultancy Services (TCS). TCS’s proposed investments in capital intensive data centres piqued investors. Comparatively, HCL said it will focus on asset light services business. Employee base decreased at TCS whereas HCL saw net additions in the September quarter. “We felt that the demand commentary was slightly more positive,” analysts at BOB Capital Markets wrote in a note on HCL.
Of course, it’s another matter that TCS continues to generate industry leading profit margins and return ratios. Notably, TCS also reported steady order inflows in the September quarter.
Steady order inflows at TCS and HCL underline the resilient business models of IT services companies. However, as superior financial performance of HCL demonstrates, some companies are ahead in adapting to technology and market changes. Investors would do well to track the differences in performance and positioning.
“With a diversified industry exposure and strong focus on AI with its own platform and partnerships, HCL Tech looks relatively better placed,” writes Madhuchanda Dey of our research team. You can read her analysis of the HCL Tech’s Q2 results here.
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R Sree Ram
Moneycontrol Pro
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