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HCL Tech On Demand, Attrition And Dividend Payout

HCL Tech retained its full-year forecast even as it reported a Q2 margin at the lower end of the guidance.

HCL Technologies at Inforum 2016 (Source: Twitter)
HCL Technologies at Inforum 2016 (Source: Twitter)

HCL Technologies Ltd. retained its full-year guidance citing improving demand for software services even as it reported a margin at the lower end of its expectations in the quarter ended September.

Revenue largely met forecasts but margin was just below consensus estimates. Analysts attributed that to a weak showing in the products and platform segment.

According to the company's management, demand outlook remained strong thanks to substantial deal bookings and a robust deal pipeline. Growth in services was also healthy with steady margins, it said.

The company retained the double-digit revenue growth and 19-21% margin guidance for FY22.

C Vijayakumar, chief executive officer and managing director; Prateek Aggarwal, chief financial officer, at HCL Tech spoke to BloombergQuint's Niraj Shah after the Q2 earnings:

Here are the key talking points:

Deal Wins

The services business grew 5.3%. Since the growth was organic, the management called it a "very strong performance".

Vijayakumar said the softness of the product business in the second quarter was a blip because a few deals slipped into the next quarter. He anticipates a recovery in the October-December period.

Around $2.3 billion of new deal bookings came largely from the services segment. Vijayakumar said when compared with FY21, the deal bookings were impressive.

Attrition And Hiring

Hiring activity continued to be strong in the second quarter but the churn also rose. Voluntary attrition has risen to 15.7% in the last 12 months.

While Vijayakumar acknowledged the concern, he said the company was hopeful that employee engagement activities will help HCL Tech curb that churn.

The company added 11,135 people in the quarter ended September. "This is the highest-ever net addition for us. Of course, over 5,500 are freshers. There is not enough lateral talent available for hiring anyways."

Dividend Payout Policy

HCL Tech raised its minimum dividend payout to 75% cumulatively over FY22-26 and announced Rs 10 a share dividend in the second quarter.

According to analysts from Jefferies, the higher payouts lower the risk of large mergers and acquisitions and boost return on equity, both of which should drive a rerating for the stock.

Aggarwal said large M&As were not the focus with the last such deal being closed in June 2019.

Brokerage View

CLSA

  • CLSA considers the quarter disappointing.

  • It could have been a perfect quarter with strong deal wins and a formal payout policy.

  • But a revenue growth miss versus the brokerage's expectations, elevated by positive management commentary going into the quarter, is a third successive slip and could weigh on valuations.

Macquarie

  • Q2 was a miss due to weakness in products business.

  • Despite strong deal wins (+38% year-on-year) and an increase in the payout ratio to 75% (from 45-50% currently), the brokerage cut the target price by 3% to Rs 1,620 per share.

  • It lowered earnings per share estimates by 2-6% for FY22-24E.

HCL Tech shares opened higher on Monday morning but quickly erased gains to trade as much as 2.9% lower. The stock has risen nearly 30% year-to-date compared with the benchmark NSE Nifty 50 index's 32% gain.

Of the 49 analysts tracking the stock, 39 recommend a 'buy', while seven recommend 'hold', according to data available on Bloomberg. The remaining three analysts have 'sell' rating on the stock. The 12-month Bloomberg consensus price target implies an upside of 13% for HCL Tech shares from current levels.