HCL Tech's second quarter to see a boost from cloud adoption — analysts expect it to breach 3.5% revenue growth guidance

• HCL Technologies guidance sets second quarter revenue to jump by ‘at least’ 3.5%, according to the company's mid-quarter review.
• Analysts believe growth may be even higher led by the demand of the company’s Information Management Systems (IMS) product offerings after expansion of partnership with IBM.
• Cloud adoption, core transformation and digital adoption will be HCL Tech’s key strengths.

HCL Technologies believes its revenue is set to grow by ‘at least’ 3.5% this quarter, according to its mid-quarter review. The company’s main strengths in the second quarter will be higher demand for cloud adoption, core transformation, and digital adoption.

Unlike its peers, Infosys and Tata Consultancy Services (TCS), HCL Tech is only known to have bagged one large deal in the last quarter. The company announced that it would be helping the Swedish telecom giant Ericsson with infrastructure management, which includes cloud migration and application services.

According to management, the acquisition of Australia-based AWS will only be finalised by the end of the year.

“We continue to expect it (HCL Tech) to be one of the winners in the accelerating demand for IT megatrends around cloud migration and AI adoption,” said brokerage Nirmal Bang in its report. The company's share price has climbed by 19.1% since the company announced its mid-quarter review.

Analysts are looking at HCL Tech with optimism and banking on the Indian IT services giant to exceed its 3.5% target and increase annual guidance. Edelweiss Research estimates that the company will revise guidance from 1.5% to 2.5% increase in revenue to at least 2.5% to 3.5% for the second-half of the current fiscal year.

HCL Tech second quarter revenue and margin estimates:

HCL Tech and its Information Management Systems (IMS)
Since one of the primary factors of HCL Tech’s success has been the impetus on cloud migration, any commentary around demand trends regarding the adoption of Information Management Systems (IMS) will be critical.

“Growth will be led by strength in IMS driven by demand for shift to cloud and remote working in Q2,” said Japanese brokerage Nomura in its report.

So far, HCL Tech has consistently gained market share with its IBM products drawing the most demand. The company’s recent expansion of its partnership with IBM should result in better performance. The pricing pressure on IMS is also limited.

“IMS to witness acceleration due to increasing demand from cloud migration & hybrid cloud adoption,” said Prabhubas Lilladhar. According to the brokerage, there is likely to be a more robust revival in IMS, given that its overall penetration in the Indian IT industry is still low between 4% to 5%.

Analysts are also curious to know more about the company’s reasons for acquiring companies in legacy areas. “The acquisition of DWS is likely to add around 0.25% to overall revenue for FY21, given the transaction is expected to close in December 2020,” said Nomura.

Use of cash and how HCL Tech will bridge the gap between it and its peers in the field of Apps are among the key things to watch out for.

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