HCL Tech fares better than peers in Q4 but what lies ahead? Top brokerages' view
HCL Tech: IDBI Capital expects the company to be at the lower end of the guidance mainly led by lower ACV growth (up 4.3% YoY vs 21% YoY in FY22).
In a positive surprise, HCL Technologies Limited -- the Noida-headquartered multinational information technology services and consulting company -- reported better than estimated numbers for the March quarter of fiscal 2023-24 (Q4FY24). Both the bottom line and top line beat ZEE Business analysts' estimates, thus boosting the investors' sentiment.
The C Vijayakumar-led company on April 20 reported a net profit of Rs 3,983 crore for the quarter under review, up 10.85 per cent YoY and down 2.75 per cent on a sequential basis. The company's revenue from operations stood at Rs 26,606 crore, up 17.7 per cent YoY. On a sequential basis, the figures dropped 0.35 per cent. Analysts at ZEE Business Research had projected the net profit at Rs 3,850 crore, down 6 per cent QoQ.
Further, the company's total deal wins during the quarter stood at $2074 million, down 8 per cent YoY. Its FY24 revenue guidance stands in the band of 6 per cent to 8 per cent YoY in constant currency terms while the EBIT margin is seen between 18 - 19 per cent, the company said in its earnings release.
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Commenting on the net TCV (total contract value), analysts at Kotak Securities note that an 8 per cent YoY decline in total deal wins presents a weak set-up for FY2024E. "We note that HCLT’s strong beginning-of-the-year guidance for FY2023 was backed by a strong 21 per cent growth in annual contract value (ACV) of deal wins in FY2022. The good part is that the deal pipeline at
the present is fairly strong with multiple mega-deals where it is a strong contender," wrote Kawaljeet Saluja, Sathishkumar and S Vamshi Krishna, in a results preview note.
As regards guidance, the brokerage notes that FY2024E consolidated and IT services revenue growth guidance of 6-8 per cent and 6.5-8.5 per cent, respectively, has a reasonable CQGR ask-rate of 1.4-2.2 per cent across four quarters of FY2024E. CQGR stands for compound quarterly growth rate. "Management’s confidence in 6-8 per cent guidance is based on a strong deal pipeline with multiple mega-cost take-out deals. Similar to our assumption on Infosys, we do not fully bake in revenues from mega-deals that are not closed at the time of guidance. EBIT margin guidance of 18-19 per cent for FY2024 was lower than our estimate of 18-20 per cent," the brokerage notes.
IDBI Capital, on the other hand, expects the company to be at the lower end of the guidance mainly led by lower ACV growth (up 4.3% YoY vs 21% YoY in FY22). Further, it expects ramp-downs in projects, delays in renewals and lower discretionary spending to further impact revenue growth. "In addition, due to headwinds like wage hikes and a lower ability to manage cost in uncertainty, we have assumed margins at the lower end of guidance (18 per cent). Consequently, we have lowered our EPS estimates by 1.7 per cent and 1.6 per cent for FY23E & FY24E. Hence, we maintain our HOLD rating on the stock with a revised target price of Rs 1,010 (16x PE on FY25E EPS)," it said in an earnings review note.
The stock on April 21 was trading over half a per cent higher at Rs 1,043.60 on the BSE.
Kotak, on the other hand, notes that a balanced portfolio of services across applications, Infrastructure Management Services (IMS) and engineering and research and development (ERD) and the ability to drive cost take-out and digital journey of clients drive confidence in growth. A high payout (87.5 per cent of net profit, 4.6 per cent dividend yield) is an added sweetener, the brokerage says, maintaining a 'BUY' rating on the stock and deriving a fair value of Rs 1,225.
Nirmal Bang Securities, however, doesn't look impressed as it notes that the worst on the macro front is not over, contrary to HCL Tech's management commentary. It, therefore, assumes a slightly lower than the guidance revenue growth for FY24 largely due to the view that the pricing trend will turn for the worse in 2HFY24. "We have raised our tax rate by 200bps and that has had a modest impact on the EPS," the brokerage notes. It maintains a ‘SELL’ rating on the stock with a target price (TP) of Rs 930 against Rs 944 projected earlier. Further, it says that in the very near term, the stock may react positively to the better than feared but it remains concerned about likely pressures emerging in 2HFY24.
Foreign brokerage JP Morgan, too, has cut the target price to Rs 880 from Rs 920 earlier and has assigned an "Underweight" rating to the stock. It said that the Q4 miss in the services business was led by discretionary spending cuts and Telecom, Manufacturing & Hitech segments was stressed. Apart, project ramp-downs and deferrals were among the factors that led to missing its FY23 CC guidance.
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