HCL Tech: Analyst follows quarter results & the crowd follows analysts

I was tracking each and every move of HCL Tech since last 4 months. Its acquisitions, its Quarter results, its day-to-day stock price, its daily news and set many alerts for this company.

HCL Tech growth remains a controversial point for many stock analysts. A couple of months back they all were bearish on HCL Tech and now they all are bullish.

Truly speaking, brokers, advisers, well wishers or whoever uncle-aunty you follow for stock recommendation is not the way to play your pitch in the stock market. The real money in the stock market comes from your own in-depth analysis of stock and market.

There is a fact that 70% of people lose their money in stock market. Now even a child can conclude that the real money is made by other 30%. And under that 30%, some luckily profited on their speculation or in simple words, the stock they were following blindly (without any self-analysis) turn out to be the top gainer.

Well said: Stock market is a place to transfer wealth from impatient person to patient.

So do you want to be on the list of smart investors? Guess what? You’re lucky cos that’s what I’m going to explain you with a quick analysis of HCL Tech last 2 quarter results and the behavior of the market.

I had already written 2 articles related to HCL Tech namely, Would you mind buying HCL Tech shares at 12.32% discount rate on CMP of 730 AND HCL Tech at its 52 weeks low: Is it a great buy? However, in this blog post, I’m going to give you some lessons on the basis of HCL Tech 2 quarter results.

A couple of months back, the internet was flooded by bearish sentiments of HCL Tech, some fundamental analysts were bearish due to its decreasing EBIT and technical analysts were estimating further drop stating that graph, charts (or whatever SMA, WMA tools they use) were showing further downward trends.

At that time HCL Tech was at 52 weeks low and they all were estimating further drop.

No, I’m not against them, they might have their own strategies. What I want to point out is that even at that time, HCL Tech had an excellent financials as compare its peers. So further price drop below its 52 weeks low gives you another chance to buy undervalued stocks at a more undervalued price. This is what known as Margin Of Safety.

Here’s what people were saying 3 months back (after announcement of March ended quarter results)

Some were recommending to exit HCL tech on a rise, others were saying – HCL disappointed the investor’s predictions. This all leads to a heavy decline in stock prices.

The other reasons behind such a great downfall in price is due to below 3 reasons:

  1. The slowdown in the company’s infrastructure services business that contributes around 36% to HCL Tech’s revenue.
  2. The company’s margin contraction— margin has contracted in the January-March quarter compared to same period last year.
  3. Investor sentiment has also taken a hit because of the management’s decision to stop giving margin guidance.

And now what they are saying (after the declaration of June ended quarter results):

That’s how market changes its color with quarter results.

No doubt, HCL Tech had given a great result this quarter. The Net Profit had grown by around 15%. This sudden growth intrigued me to peak over their financials to figure out whether the growth is due to cost cutting or reduction in COGS or by using some legal accounting tricks.

But shocked to know that even at the time when other IT companies are struggling to grow, HCL outperformed the sector. The increase in profit is due to increase in revenue. Not due to the reasons mentioned formerly.

Some companies also report a good profit despite no revenue growth because they manage to reduce their production cost, interest cost or use some other accounting tricks to legally manipulate the accounts but the revenue can’t get manipulated as there is no other variable from which it is derived. So the HCL is making a real growth.

Let us look at its financials.

You can figure out easily from the statement above that how company maintained its margin at difference stages. OPM, NP etc had a sharp growth and that’s all because of high revenue growth. I’m not going to go further deep in all the deals and actions throughout the year. That you can access in their quarter report here – http://www.hcltech.com/investors/results-reports

The reason behind the revenue is the increment in client base mainly from Europe and America. Below is everything you should know about their clients:

They just lose a single client from the high category. Rest, they had a growth of many wallets out, ready to buy clients this quarter. That’s the main reason behind the revenue growth.

In short, I would conclude the positional state of company from the key five takeaways outsourced from economic times:

Dollar revenue: The IT firm reported a 6.5 per cent QoQ and 10 per cent YoY growth in dollar revenues at $1691 million. Net profit rose 7.1 per cent QoQ and 9.5 per cent on a YoY basis to $305 million.

FY17 guidance: HCL Technologies surprised the Street and analysts by giving a guidance for this financial year. On the revenue front, HCL management expects FY17 revenue growth to rise between 12 per cent and 14 per cent in constant currency terms.

Dividend: HCL Technologies has informed BSE that the board of directors of the company at its meeting held on August 03 declared an interim dividend of Rs 6 per equity share of Rs 2 each of the company for the financial year 2016-17.

Deal wins: HCL Tech signed 13 transformational deals during quarter across service lines and industry verticals. The broad-based business wins were driven by next generation integrated offerings such as Next-Gen ITO, BEYONDigital and IoT WoRKS, reflecting investments in Internet of Things, digital technologies, cloud, automation and artificial intelligence.

Growth across geographies: HCL Technologies revenues grew 10.7 per cent. The fourth largest IT exporter saw broad-based growth across all revenue segments. America and Europe grew by 13.7 per cent and 10.6 per cent respectively, driven by Infrastructure Services at 18.0 per cent, Engineering and R&D Services at 10.4 per cent, Business Services at 10.1 per cent, and Application Services at 4.7 per cent.

What I learned from HCL Tech March ended Quarter results?

The great companies occasionally make correctable mistakes – over the short term which destroy the price of their stock. When this happen, the stock becomes misappraised from a long-term perspective. The key here is to determine whether the error is correctable.

HCL showed a decrease in EBIT margins in march quarter which stuck its price to 52 weeks low. Is the mistake correctable? – that is what you need to estimate. Better the estimation, better your investment decisions. And to determine this you should know the economic nature of the company.

Company’s financials were showing a strong fundamental at that time far better than its peers. However, IT sector as a whole was struggling to get clients but HCL Tech managed to beat this problem by many new initiatives which are also highlighted in their report. It acquired 2 companies this year and had many deals signed from US and UK firms.

So here’s the crux – Great investment opportunity comes around when excellent companies are surrounded by unusual circumstances that cause the stock to be misappraised.

And smart investors find that opportunity.

American Express (a US company) was once in 1963 stuck by a Salad Oil Scandal, this pushed the price down by around 50%. Here’s how Wikipedia explains it:

Once the scandal was exposed – because the Russian soybean market did not open up, and soybean prices fells drastically as a result, causing the investors to attempt to cash in – American Express was one of the biggest casualties. Its stock dropped more than 50% as a result of the scandal, which cost the company nearly $58 million.

Warren Buffet found this a great opportunity and he locked high amount of funds in this company. Now this company managed to take place in the top 10 holdings of Mr. Buffett. I would also suggest you to read the 47-page presentation by well known Indian Value Investor Sanjay Bakshi on Float and Moat where he explained this case in detail.

What I learned from HCL Tech June ended Quarter results?

Uncertainty in the stock market creates fear and fear creates panic selling, which forces the prices downward regardless of business’s long-term economic prospects. This creates a great opportunity if the long-term economic value of the business is in excess of its selling prices.

On BREXIT day, Tata Steel was stuck the most due to future trading uncertainty which downgraded its price by around more than 15%. Here again, uncertainty creates fear and fear creates heavy sell-off which leads to declining in prices and this is where the great opportunity exists.

In a couple of weeks, the finance minister announced some relaxation for BREXIT hit firms and the UK showed their positive concern which created some certainty & fear reduction & heavy buying & price hike. This is how the market works.

Your responsibility as a smart investor is to enter it when other are fearful and leave it when others are greedy. That’s where the real treasure is hidden. Luckily, I entered the HCL Tech at 722 and exited at 835.

Here’s the crux – Uncertainty actually is the friend of the buyer of long-term values.

Never follow market sentiments. In short, this is how market works – “Analyst follows quarter results and the crowd follows analysts”

  • When HCL Tech announced weak reports in March end, analysts showed their bearish trend for future results and highly recommended to stay away from this stock. Eventually, the market crowd also followed them. Final outcome = Red stock.
  • When HCL Tech announced strong reports in June end, analysts showed their bullish trend for future results and highly recommend others to enter the stock. Eventually, the market crowd also followed them. Final outcome = Green stock.

This is how stock price goes up and down. And if you want to beat the market then always be opposite to trend which needs great courage. The real profit is not in buying and sell stocks instead of having emotional discipline while you invest.

Don’t get affected by market sentiments. Market participants just follow each other. You just have to be fearful when others are greedy and greedy when other are fearful.

Professional advisers, money manager, brokers tend not to see companies and stocks as businesses but as bouncing numbers on the screen on which they can place bets. And your job is to make money off these gamblers when they oversell a business and drive the stock price to the point where it is extremely cheap as compared to its long-term value of its underlying value of the business.

So just remember your job and treat the stock as a business, not as a product which goes up and down on daily basis. To make a good investment, you need to know every in and out of the company. Read their annual reports, understand their economic conditions, try contacting to their investor relations department.

I receive a sheer amount of email on the daily basis and guess what? 90% of them end up asking any multi-bagger or hot picks for 2-3 months. I’m not here to give you stock suggestions instead I want you to be capable of analyzing stock on your own so that you can take your own investment decisions. And I’m always happy to assist you. Meet you in comments.

  • Nitesh Kodle

    Hi Sowmay,

    Your articles are great, each article has a good amount of learning for me.

    Could you please tell me hows Dlink.

    Nitesh Kodle

  • sreeni

    hi sowmay,
    I am very happy to follow your blog. I had entered in stock market. i had analyzed so many stocks and keep on following that. But actually the problem is many the stocks which are fundamentally good their prices(except IT stocks) are very high. Always they trading near at 52W high. So as to take decision to buy that Stock or not it is very questionable? . Based on Financial balance sheet or what ever how nearly estimate intrinsic value of particular stock.

  • Sreeni Kumar

    Hi Sowmay,
    I am very happy to follow ur blog. It is very good effort wake up sleepy investors like me. I am appreciating your good explanation and approach regarding stock market. i had followed every article. I had gone through so many stocks which are fundamentally good. I had gone through their webs and balance sheets. But all most all they are trading at 52W high price(except IT companies). I had already bought some stocks. so how to evaluate buy/sell price of particular stock at current situation? Is there any procedure like DCF model…. to evaluate a stock.

    but it is very tedious to calculate. is it right time to enter into stock market. Already u are much aware than me regarding stock prices. Because it is not easy to get a good stock with right price. so what might be the best strategy?

  • Tarun Sareen

    sowmay your analysis is excellent,,,all your articles are superb…good fundamental research…you yourself think like mr buffet it seems…..but research requires a hell lot of time….Should one leave his job to take stock investing as a full time occupation ?

  • I’m currently writing an article on valuation. Stay connected to get notified.

  • Sreenivas Doosa

    Another great post Sowmay. It would be great help if you can also write a new article on when to sell a stock considering both short term and long term perspectives.

    • Of course, Sreenivas. It’s on my list but currently, I’m busy with some other topics.

  • I’m currently writing an article on valuation. Stay connected to get notified.
    Strategy is simple. Just keep track of industry and business economy of the stock then you’ll be able to compare and value stocks. It’s that hard and it’s that easy.

  • You can do it with your current job also. What you need is time management. There are many resources that made the research past efficient like join the forum like valuepickr. Set google alerts, use moneycontrol alerts to get updates. There are many other.

    • Tarun Sareen

      thanks sirji

  • Srishti Arora

    Another great work sowmay.