Technology stocks have caught the Street’s fancy over the past one year with the rupee ceding ground, even as heavyweights TCS and Infosys have bagged large deals. While the Nifty IT index has gone up by 5% (as of November 11), the stocks of TCS and Infosys have spiked by 41% and 43%. HCL Technologies, however, has been playing catch up, with the stock gaining just 17%, owing to relatively subdued operational performance over the past two quarters. While HCL’s revenue grew by 14% (yoy) in June 2018 and 2% in March 2018, TCS revenue was up 16% and 8%, while Infosys’ revenue grew 12% and 5.63% over the same period.
However, the trend changed in Q2 of FY19 as the company met the Street’s expectation with revenue growing 19.5% year-on-year (yoy) to Rs.148.61 billion, EBIT increased by 21% to Rs.29.96 billion. The revenue growth was driven by better performance in North America, which accounts for 69% of the revenue. As a result, the stock rose by 8%, since the announcement of Q2 results on October 23.
Amid the stock surge, promoter Shiv Nadar-owned entity Vama Sundari Investments Delhi Private bought 1.1 million shares worth Rs.1 billion in two tranches on October 30 and November 2, increasing its stake marginally to 42.90% against 42.82%. This comes just days after promoter entities — Vama Sundari Investments Delhi, HCL Avitas, HCL Corporation and HCL Holdings — tendered over 10 million shares worth Rs.27.70 billion in a buy-back. The company had announced the buyback of shares worth Rs.40 billion. While the promoters tendered their shares at Rs.1,100 on October 10, they bought shares from the open market at Rs. 1,007. When the promoter entities tendered their shares on October 23, the stock had closed at Rs.1,066.45 on the BSE. Prior to the transactions in October and November, the promoter had bought shares worth Rs.14.46 billion and sold shares worth Rs.10.64 billion in the open market in FY18. As of September 2018, promoter holding is 60.17%, rising slightly from 59.68% in March 2017.
Following the Q2 results, analysts are now bullish on the stock. In the latest conference call, the management has reiterated its margin outlook at 19.5-20.5% for FY19 and analysts believe that the company will be able to achieve the target. “Taking into consideration H1FY19 margin performance and strong Q3 despite partial wage hike impact (70 bps), we upgrade our EBIT margin estimates to 20% each in FY19E, FY20E,” states an ICICI Direct report. The brokerage, which finds the stock trading at an attractive valuation (12x FY20E EPS), has revised its price target to Rs.1090.
In line with the changing outlook, foreign portfolio investors, too, have been increasing their stake — up from 25.31% in September 2017 to 28.01% in September 2018. Currently, Artisan International Value Fund is the biggest foreign investors, holding 1.45% as of September. Incidentally, mutual funds have pared their stakes from 5.80% to 4.85% over the past four quarters.