HCL Tech Q3: Weak macros, narrow FY23 guidance limit upside, warn analysts


Although (HCL Tech) reported an all-round beat in the December quarter of this fiscal year (Q3FY23), the management’s narrowed revenue and margin guidance for FY23 worried investors on Dalal Street.

In Friday’s intra-day trade, the stock declined 2.7 per cent to Rs 1,042 per share, as against 0.5 per cent drop in the S&P BSE Sensex.

The IT major delivered 5 per cent quarter-on-quarter (QoQ) revenue growth in cross-currency (CC) terms to $3,244 million in Q3FY23, beating brokerage estimates of 2-3 per cent. EBIT margin, too, was ahead of Street estimates as it expanded by nearly 165 basis points (bps) QoQ to 19.6 per cent, against 60 bps estimate.

However, the reduced revenue growth guidance for FY23 to 13.5-14 per cent from 13.5-14.5 per cent, and margin guidance to 18-18.5 per cent from 18-19 per cent indicated softness in Q4FY23, on the back of seasonal weakness and drop in products and platforms (P&P) business, said analysts.

Here’s what top brokerage houses decoded about HCL Tech’s Q3 numbers:

Jefferies | Maintain Hold | Target price (TP): Rs 1,050

Over FY23-25, analysts expect the IT major to deliver 7 per cent revenue growth in CC terms and 11 per cent EPS CAGR, supported by slight recovery in margins. However, the higher exposure to products and ER&D (engineering, research, and development) businesses could drag revenues in a recessionary environment. Given significant margin pressures and lowering of margin guidance by the management, analysts believe the stock trades at a 12 per cent premium to its 5-year average PE, which limits upside.

Motilal Oswal | Maintain Buy | TP: Rs 1,270

The strong sequential growth within services, along with deal wins and a solid pipeline, indicate an improved outlook. Easing supply chain scenario, strong margin trajectory, too, provide comfort on the company’s margin profile, said analysts. Therefore, given HCL Tech’s IMS (infrastructure management services) and digital space capabilities, strategic partnerships, and investments in cloud, HCL Tech is likely to emerge stronger on the back of a healthy demand environment.

Kotak Institutional Equities | Maintain Buy | TP: Rs 1,280

Analysts increased revenue estimates by 0-1 per cent in US dollar terms, and EBIT margin by 10-30 bps, driven by favorable cross-currency shifts, and higher product revenue. Though the management has guided margins in the range of 18-18.5 per cent, moderation in attrition, lateral premiums, and lower subcontractor usage are likely to aid margins to get closer to 19 per cent.

Phillip Capital | Maintain Neutral | TP: Rs 1,030

Despite a strong performance, analysts believe that the management indicated a weak Q4FY23 after it narrowed guidance in services and total revenue growth. An uncertain outlook on Products and ERD businesses, which makes up 29 per cent of the overall revenue, is a negative, cautioned analyst. At 18.4x FY24 PE, valuations remain relatively inexpensive; therefore, the brokerage firm shared a ‘neutral’ stance on the counter.

IDBI Capital | Downgrade to Hold | TP: Rs 1,140

Despite strong revenue growth, the company has reiterated guidance of 13.5-14 per cent in FY23, which indicates de-growth in Q4FY23, driven by lower product revenues and macro challenges. The brokerage firm believes that challenges in Europe, lower discretionary spends, and soft product revenues would impact near-term revenue growth. Although the company would benefit from vendor consolidating, macro-challenges would keep financials under check.

Nirmal Bang | Maintain Sell | TP: Rs 847

Though the management was optimistic about near-to-medium term growth outlook, driven by vendor consolidation, cost optimization, and large integrated opportunities; a few soft quarters are likely in foreseeable future. Analysts believe that the stagflationary environment in the West could affect tech spending in FY24. Since HCL Tech is up against entire Tier-1 peers & international players, a tepid macro-environment could weigh cost optimization measures.


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