HCL Tech share price jumps 3% today after Q4 results beat market expectations; Should you buy, hold or sell?

HCL Technologies Ltd., one of India's leading software and IT services companies, reported its Q4 results for the fiscal year 2020-2021 on April 16, 2021. The company's strong financial performance, which exceeded market expectations, led to a 3% jump in its share price on the same day. In this article, we will examine the details of HCL Tech's Q4 results and evaluate whether investors should buy, hold or sell the company's shares.

Revenue Growth

HCL Tech's Q4 revenue grew by 5.7% sequentially to reach $2.74 billion. This exceeded the company's guidance range of 1.5%-2.5% sequential growth, and was driven by growth across all its major business segments. The company's revenue growth was also higher than that of its peers, including Tata Consultancy Services and Infosys, which reported sequential revenue growth of 4.2% and 2.8%, respectively, in their most recent quarters.

Profit Margin

HCL Tech's operating profit margin (OPM) for Q4 stood at 21.6%, up from 20.5% in the previous quarter. This was the company's highest-ever quarterly OPM, and was achieved through operational efficiencies and cost optimization measures. HCL Tech's net profit for Q4 was $505 million, up 12.7% sequentially and 41.6% year-on-year.

Deal Wins

HCL Tech reported deal wins worth $3.1 billion in Q4, which included large contracts with companies such as Xerox and Barclays. The company's total contract value (TCV) for the fiscal year 2020-2021 was $10.02 billion, up 35.1% year-on-year. HCL Tech's strong deal pipeline, which includes several large deals in the pipeline, bodes well for its revenue growth prospects in the near future.

Dividend and Bonus Issue

HCL Tech's board of directors recommended a final dividend of Rs. 6 per share, taking the total dividend for the fiscal year to Rs. 18 per share. The company also announced a bonus issue of one equity share for every share held, subject to shareholder approval. This is expected to improve liquidity and enhance shareholder value.

Outlook

HCL Tech's management remains optimistic about the company's growth prospects, citing strong demand for its services in the areas of digital transformation, cloud, and cybersecurity. The company expects to grow its revenue by 12%-14% in constant currency terms in the fiscal year 2021-2022, which is higher than the industry growth rate of 8%-10%. HCL Tech's strong deal wins, expanding client base, and focus on innovation and automation should help it achieve its growth targets.

Should You Buy, Hold or Sell?

HCL Tech's strong financial performance in Q4 and its positive outlook for the future make it an attractive investment opportunity for long-term investors. The company's strong deal pipeline, expanding client base, and focus on innovation and automation bode well for its growth prospects. Moreover, the company's dividend and bonus issue announcements are expected to enhance shareholder value.

However, investors should also consider the risks associated with investing in the IT services sector, including currency fluctuations, geopolitical uncertainties, and competition from domestic and international players. Moreover, HCL Tech's high exposure to the US market, which accounts for over 60% of its revenue, makes it vulnerable to changes in the US economic and regulatory environment.

In conclusion, investors who are willing to take on some level of risk and have a long-term investment horizon may consider buying or holding HCL Tech's shares. However, investors should also diversify their portfolios and monitor the company's performance closely to ensureSure, here are some additional points to consider when evaluating whether to buy, hold, or sell HCL Tech's shares:

Market Capitalization

As of April 21, 2021, HCL Tech's market capitalization was approximately $40 billion. This puts the company in the same league as other Indian IT services giants like TCS, Infosys, and Wipro. However, HCL Tech's market capitalization is still significantly smaller than that of global IT services players like Accenture and IBM.

Valuation

HCL Tech's shares are currently trading at a price-to-earnings (P/E) ratio of around 17, which is lower than the industry average of around 25. This suggests that the company's shares may be undervalued compared to its peers. However, investors should also consider other valuation metrics, such as price-to-sales and price-to-book ratios, to get a more comprehensive picture of the company's valuation.

Competition

HCL Tech operates in a highly competitive industry, with both domestic and international players vying for market share. The company faces competition from other Indian IT services firms like TCS, Infosys, and Wipro, as well as global players like Accenture, IBM, and Capgemini. Investors should monitor the competitive landscape closely to ensure that HCL Tech can maintain its market share and pricing power.

Geographic Diversification

As mentioned earlier, HCL Tech derives a significant portion of its revenue from the US market. While this has been a key growth driver for the company, it also exposes it to risks associated with the US economic and regulatory environment. Investors may want to consider whether HCL Tech's geographic diversification is adequate, and whether it is taking steps to expand its presence in other regions.

In summary, HCL Tech's strong Q4 results, positive outlook, and attractive valuation may make it an appealing investment opportunity for long-term investors. However, investors should also consider the risks associated with investing in the IT services sector, as well as HCL Tech's competition, market capitalization, and geographic diversification. A well-diversified portfolio and careful monitoring of HCL Tech's performance and competitive landscape can help investors make informed decisions.