If the management commentary from leading IT services firms is any indication, then the sector is living up to its reputation as a 'defensive' bet against the ill-winds sweeping the rest of the economy.
On Thursday, Infosys positively surprised the market with its guidance and today HCL Tech's outlook gives has further boosted the confidence of analysts and fund managers.
Speaking to CNBC-TV18, the HCL Tech management said that the worst was behind for the company and they were positioning themselves for a recovery starting from this quarter. In other words, the first quarter (April-June) absorbed much of the blow to revenues resulting from issues relating to the COVID 19 pandemic.
"We have managed costs, customer satisfaction, taking care of employees, reimagined business process. We have won 11 transformational deals this quarter. We believe that the worst is behind us," said CEO C Vjayakumar.
"Our deal pipeline is 40 percent higher than at the end of March. We feel confident of decent growth of 1.5-2.5 percent in Q2," he said, adding that HCL Tech expected to round off the year with a strong fourth quarter performance.
"Barring an even stronger second wave of COVID, I feel confident for next quarters and next fiscal," he said.
The major surprise during the quarter gone by was the 340-basis points increase in earnings before interest and taxes (EBIT) to 20.5 percent.
"This has exceeded the average of the last few quarters," said Prateek Aggarwal, CFO of the company.
"EBITDA margins increased 490 basis points. All this was possible because of getting to work early and executing well. Rupee depreciation also helped, adding 80 bps during the quarter," he said.
The company expects a full-year EBIT margin between 19.5 percent and 20.5 percent. EBIT margin in FY20 was 19.5 percent.
"The 19.5-20.5 percent range is the traditional margin guidance over the last few quarters. We are projecting growth in the next three quarters," said Aggarwal.
The company expects revenues to grow 1.5- 2.5 percent each quarter, and has guided for full figure of between -2 percent and 0.5 percent.
The bigger number, said Aggarwal, was the cash generation of the company which gives them levers to reinvest in the business.
"We are telling shareholders to focus on cash EPS (Earning per share):" he said. "Free cash flow of $757 million was more than double the quarterly run rate for FY20;" he said.
For the quarter, US business was down 6.9, percent, Europe 8.5 percent. Among key business verticals, financial services was down 1.7 percent, manufacturing fell 18.8 percent, retail and consumer packaged goods down by 9 percent, tech and services down 1.2 percent, telecom, media and entertainment down by 15.5 pecrent. Life sciences and healthcare though grew 1.2 percent.
The company said recovery will be slow in manufacturing and retail, whereas life sciences and healthcare are already seeing an uptick.
