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Ravi Menon, an analyst at Macquarie, highlights HCL Technologies' impressive performance in the recent quarter, characterized by broad-based growth across all segments and notable margin improvements. Menon anticipates further margin expansion, particularly driven by the software products portfolio which possesses significant operating leverage. He also expects HCL Tech to continue its upward trajectory, outperforming its peers like Infosys.
Menon attributes the strong performance to various factors, including utilization headroom, productivity enhancements, and the company's shift away from viewing headcount as a primary growth indicator. He acknowledges the cautious approach of management in refraining from raising the upper end of their guidance, likely stemming from their experience in FY23 when they had to adjust guidance due to unforeseen circumstances.
Looking ahead, Menon forecasts a significant re-rating of HCL Tech's stock, driven by the sustained growth trajectory and improved visibility post-COVID. He anticipates a divergence in performance within the IT sector, with HCL Tech and TCS expected to lead the pack, while Infosys lags behind due to its relatively smaller services portfolio. This divergence, however, is expected to be beneficial to the sector overall, with growth rates varying across companies.
Menon emphasizes the importance of understanding the nuances within the ER&D segment, particularly in the automotive sector, where HCL has experienced some pressure due to client-specific challenges. While he acknowledges the excitement surrounding AI, he believes it's still early days in terms of widespread demand. He cites Persistent as a company well-positioned to capitalize on the AI trend due to its strong relationships with software product vendors.
Overall, Menon's analysis paints a positive picture for HCL Tech's future, driven by its strong performance, improved margins, and the potential for further growth. While he acknowledges challenges in certain areas, he expects HCL Tech to continue outperforming its peers and benefit from the broader positive trends within the IT sector.
Source: HCL Tech's broad-based growth & margin boosts signal strong future performance: Ravi Menon