HCL Tech has to grow faster to achieve FY23 target

HCL Technologies Ltd. has exceeded expectations on all key financial metrics in the quarter ended Dec. 31. So much so that it’s now staring at its slowest revenue growth in at least four quarters.

Revenue at India’s third-largest IT services firm rose 8.1% sequentially to Rs 26,700 crore in the quarter ended Dec. 31, according to an exchange filing on Thursday. That compares with the Rs 26,089-crore consensus estimate of analysts tracked by Bloomberg.

HCL Technologies Q3 Results: Key Highlights (QoQ)

• Revenue up 8.1% at Rs 26,700 crore (Estimate: Rs 26,089 crore)
• EBIT up 18.09% at Rs 5,228 crore (Estimate: Rs 4,827 crore)
• EBIT margin at 19.58% versus 17.93% (Estimate: 18.5%)
• Net profit up 17.46% at Rs 4,096 crore (Estimate: Rs 3,814 crore)

The Noida-headquartered IT firm, which recently tempered its FY23 growth guidance to lower end of 13.5-14.5% band, has once again revised the forecast to 13.5-14% in constant currency terms. Now, the company’s revenue has to grow by at least 1.78% sequentially in constant currency terms to achieve the target, according to BQ Prime’s calculations.

That’s higher than the 1.1% constant-currency growth achieved in Q4 FY22 but slower than the 2.5% constant-currency growth in Q4 FY21, HCL Tech’s financial statements show.

Brokerages said strong bookings will help HCL Tech get over the hump.

“The deal wins remained strong (book-to-bill of 0.7 times),” Motilal Oswal said in a post-earnings report. “While there is visible weakness in macro, especially in Europe, increased vendor consolidation deals, a strong pipeline of cost takeout deals, and favourable pricing should help HCLT tackle any softness in discretionary spending and weak macro.”

The strong revenue growth guidance and margin performance, amid a grim outlook for the I.T. services sector, should boost investor confidence in HCL Tech’s business and lower the valuation gap with Tier-I peers Infosys Ltd. and Tata Consultancy Services Ltd., the Mumbai-based brokerage firm said.

“We continue to see HCL Tech’s defensive business as positive in a demand-constrained environment,” it said. “We reiterate our ‘buy’ rating with a target price of Rs 1,270 apiece.”

HCL Tech surpassed TCS and Infosys by delivering a beat on both revenue and margin, Kumar Rakesh of BNP Paribas wrote in a research report. “The performance was driven by the software business even as the services business matched up to peers, despite higher-than-usual furloughs.”

Even though there may be some delay in decision making because of the situation in Europe, a strong deal pipeline should hold the company in good stead over the next two quarters. Bloomberg