Technology major HCL Tech came out with a revenue warning on Wednesday, saying a client-specific issue as well as cross-currency headwinds will take a toll on this quarter.
Mukul Garg, IT analyst, Societe Generale says this is a one-off client issue and investors should still buy the stock on dips today.
"We see a minor impact of this issue and almost no impact on its revenue growth, " he explains, adding that investors should continue accumulating the stock and ruling out impact on peer companies.
Below is the transcript of Mukul Garg's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.
Latha: Put it in context -- there are some people who have given some fairly severe downgrades for the stock expecting the valuations to be brought down from 15 times to even 12 times. First what are you reducing by way of earnings per share (EPS) before we come to valuation?
A: If you look at this particular one-client issue, what is happening with the company is that you had a client where you had a disagreement and this is pretty standard in the industry, it has happened multiple times in the past globally. So the way we will look at this particular case is that we think this is a one time impact. This is going to flow into EPS. The way we would recommend is to look at this as a non-operating item, this is a one time issue which will flow into EPS for this quarter. The impact should be about 6-6.5 percent for this quarter but over a long-term recurring basis, this should not lead to any issue with the company. So we think this is a one of minor impact.
Sonia: That point is taken that this could perhaps be a minor impact but what this also does is raises the questions about the quality and profitability of the recent deals that HCL Technologies has also struck, would that be something that worries you?
A: I agree that this does raise some question about what is happening and we would definitely look out for more clarity from the management on this but to put this in context, this was a 20 million impact which has come in on a client where you had a multi-year project. So the quarterly impact from this issue would not have been more than a couple of million dollars and the company which has a quarterly run rate of USD 1.5 billion and revenues. So first of all, this is not a huge impact, this is a small impact.
Secondly, these sort of issues keep on happening across the globe. You have issues like the recent issue with US Healthcare.Gov where CGI was the vendour, you have had issues with NHS in past where Accenture was the vendour and you have similar issues with IBM across the world. Normally these type of contracts are multi-billion in nature where the impact is substantial. This contract is a USD 20 million contract. So we would not read too much into this as an ongoing thing. This is something which has rarely happened with Indian IT services sector and same goes for HCL Technologies.
Latha: So no question of lowering valuations?
A: No, we still see HCL Technologies as one of the best positioned companies into this sector. They have a very good business strategy where they have positioned themselves well in outsourcing and more recently in R&D outsourcing space.
So we would recommend investors if there is a dip today to buy into this stock.For full interview, watch accompanying video...
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