Thoughts About HCL Tech’s Performance in Q2 FY20

/ November 9, 2019/ Financials, HCL Tech, India

HCL Tech’s ERS accelerated its yoy growth in Q2 FY20 to +15.0% at CC, from +13.3%. Its EBIT margin also increased from 16.0% in Q1 to 21.4% in Q2. The financial improvement results from mostly a catch-up effect: ERS recognized revenues in Q2 that it it could not do in Q1.

This suggests that the “average” performance of ERS is currently a growth of ~+14% yoy at CC and an EBIT margin of ~17%. This is an impressive performance. Now that it has provided more visibility of its ERS revenues, HCL Tech is no longer a top-three ER&D services vendor. However, it is the best performer in financial terms.

While investors are very much focused on the IBM software products acquisition, it was good to see HCL Tech maintain its focus on ERS. During the quarter, HCL Tech acquired Sankalp Semiconductor, a chip design specialist. Sankalp had revenues in FY19 of INR 1,412m (USD 20m). HCL is making the acquisition in counter-cycle, while major competitors (Altran, Alten, LTTS) reported weakness from chip clients. We see the move as a move by HCL Tech as both a commitment to the semiconductor industry in the long-run, and, probably, an opportunistic move to buy competitors are lower multiples.

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