HCL Technologies share price jumps most since June

Shares of HCL Technologies Ltd. gained the most in nearly four months as analysts raised their earnings per share estimates for the IT services exporter after the second quarter.

Revenue of the Noida-based IT services firm increased 5% sequentially to Rs 24,686 crore in the quarter ended Sept. 30. It met the consensus analysts estimate of Rs 24,513.4 crore.

HCL Technologies Q2 FY23 Highlights (QoQ)

• Net profit rose 6% to Rs 3,489 crore
• EBIT rose 11% to Rs 4,427 crore
• EBIT margin expanded to 18% from 17%
• Attrition flat at 23.8% on the last 12-month basis.

HCL Technologies expects revenue growth for services at 16–17% year-on-year in constant currency terms.

“Revenue guidance at 16-17% for services and 13.5-14.5% at company level, reflective of our strong growth visibility,” Chief Financial Officer Prateek Aggarwal said. The company had guided for 12-14% growth (company level) in the first quarter.

Motilal Oswal in a post-earnings report said, “This strong growth guidance and margin performance (despite wage hikes) in an environment, where the demand for IT services is expected to be incrementally weaker, should help improve investor confidence on its business and lower the valuation gap with larger Tier-1 IT services peers.”

“We continue to see HCLT’s defensive business as a positive in a demand constrained environment,” the brokerage said.

Shares of HCL Technologies gained as much as 3.9%—the most since June 21—at open on Thursday. The results were declared after the markets closed on Wednesday.

Of the 46 analysts tracking the company, 30 have a ‘buy’ rating, 12 recommend a ‘hold’ and four a ‘sell’, according to Bloomberg data. The average of the 12-month consensus price target implies an upside of 11.6%.

Here’s what analysts made of HCL Technologies’ Q2 FY23 results:

Kotak Institutional Equities

• Rates ‘buy’, raises fair value to Rs 1,250 from Rs 1,165—a potential 31.3% upside.
• Raises FY23-25 constant currency revenue estimates by 30-80 basis points.
• Raises earnings per share by 2-3% on strong show across all dimensions.
• Margin will improve over the next three years driven by easing supply-side pressures and improvement in digital services profitability.
• Stock trading at inexpensive 16 times the FY24 EPS, a significant discount to peers.
• Company deserves a higher multiple for much improved IT business, efficient capital allocation with a payout ratio of 75% and likely improvement in profitability.

Jefferies

• Maintains ‘hold’, raises target price to Rs 990 from Rs 980—a 4% upside.
• Raises FY23-25 EPS estimates by 3-5% to factor earnings beat as well as rupee depreciation vs U.S dollar.
• Expects HCL to deliver 11% constant currency revenue CAGR over fiscal 2022-2024
• Expects a lower 8% earnings per share CAGR over fiscal 2022-2024 due to margin contraction.
• Sees limited upside to stock amid rising demand uncertainty.
• Expects company to achieve the lower end of FY23 margin guidance of 18-19%.
• Raises margin estimates by 40-50 basis points to factor beat.
• Expects margin to remain in the18-18.4% range over FY23-25.
• Raises FY23-24 constant currency growth forecast by 60-130 basis points to factor higher guidance and mega deal win.
• Lowers U.S. dollar revenue estimates for FY23-25 slightly, owing to cross-currency headwinds.

Motilal Oswal

• Reiterates ‘buy’ with a target price Rs 1,240 apiece, implying an upside of 32%.
• Guidance increase may help drive stock rerating.
• Expects HCL to deliver FY23 margin at lower end of its margin guidance, and improve to 18.7% in FY24.
• The company, on a combined basis, is expected to deliver dollar revenue growth of 10% and corresponding PAT CAGR of 11.3% over FY22-24.
• The stock is currently trading at an inexpensive 15 times FY24 EPS, offering a margin of safety.
• Increases profit after tax and EPS estimates for FY23 and FY24 by 4%-6%.

Phillip Capital

• Maintains ‘neutral’, raises target price to Rs 1,050 from Rs 1,030, implying a potential 10% upside.
• Products and platforms business continued to drag the overall company growth.
• HCL Technologies should be able to meet the new revenue growth guidance given its strong performance in the first half of this fiscal, strong bookings and pipeline commentary.
• Company might miss the narrowed margin guidance of 18-19% slightly.
• Sees HCL’s portfolio comprising 17% engineering and R&D (discretionary spend dependent) and 10% P&P business (volatile)—limit its upside potential.
• Upgrades FY23/24 estimates by 2%/4% on slightly better revenue and margins
  Moves its USD-INR assumption to Rs 82 from Rs 80.

IDBI Capital

• Upgrades to ‘buy’ from ‘hold’ with a target price Rs 1,095 apiece. This implies a potential upside of 15%.
• Revises EBIT estimates upwards leading to EPS upgrade of 3% in FY24.
• Cost efficiency projects, synergy with products leading to mega deals, market share gain and improvement in ER&D to drive IT services growth.
• Expects margin to improve by 40 basis points in FY24 led by higher utilisation, SG&A leverage, pyramid, easing of supply-side pressure and higher product revenue.