TCS vs HCL Tech Q1 preview: Here's what brokerages expect from the IT majors

Tata Consultancy Services (TCS) and HCL Technologies will announce their earnings for the June 2023 quarter today, officially kicking off the result season for India Inc. Not only the revenue, bottomline and margin growth, analysts believe that attrition, deal wins, management commentary and interim dividend announcement would be the key triggers to watch out. Market experts expect the Indian IT companies to report another quarter of flattish revenue growth, while margins might see some improvement on a sequential basis. They see more companies to maintain revenue growth guidance for FY24, they said. In-line with the overall sombre environment of the IT sector, we expect TCS to report a muted revenue growth for the quarter. This is a direct result of slower deal pipeline conversions and project delays/cancellation this quarter, which in effect impacted its growth trajectory, said Dhruv Mudaraddi, Research Analyst at Stoxbox, citing margins to be another key trigger. "Considering the multiple headwinds in the IT sector and muted growth in ER&D segment, we expect HCL Technologies to report a flattish growth in cc terms in Q1FY24 despite the ramp-up in its large deal wins. Along similar lines, margins are also expected to remain flat due to commitments made in the services business," he added while commenting on HCL Tech.Revenue and profits Antique Stock Brokings sees TCS to report a revenue at Rs 59,610.4 crore, growing 13 per cent YoY and flat on a sequential (QoQ) basis, while profit is seen at Rs 10,901.4 crore, rising 14 per cent YoY but falling 5.2 per cent QoQ. However, it sees HCL Tech's revenue at 26,961.4 crore, up 15 per cent YoY and 1.3 per cent QoQ, with profit rising 19 per cent YoY to 3,912.5 crore. Kotak Institutional Equities expects TCS to report revenue at 59,355.7 crore, rising 13 per net YoY with a net profit at Rs 10,983.3 crore, rising 16 per cent YoY but falling 4 per cent QoQ. It sees HCL Tech's revenue to rise 15 per cent YoY to 26,963.2 crore, while profit is seen at 3,886.7 crore, up 18 per cnet YoY but down 2 per cent QoQ.Constant Currency Phillip Capital expects CC revenue growth of 0.5 per cent QoQ for TCs. Modest growth on account of weakness in discretionary spending and cautious sentiment across major verticals. It expects CC revenue growth 0.5 per cent for HCL Tech but margins are expected to remain flat due to weak growth and productivity commitments to certain customers in the services business. "Our forecast of 1 per cent organic c/c revenue growth rate for HCL Tech is based on 3 per cent QoQ growth in IT services courtesy of ramp-up in mega-deals; 2.5 per cent QoQ revenue decline in ERD and 4.1 QoQ decline in the products segment, said Kotak. "The ERD segment will have to bear full quarter impact of programs that came to an end or were cancelled."EBIT Margins HCL Tech's discretionary spending in IT has slowed, although offset by mega-deal ramp-up. EBIT margin will remain stable qoq. Pressure from a large deal ramp-up will be offset by operational improvements, said Kotak. It sees HCL Tech's EBIT margins softening 12 basis points (bps) to 21.2 per cent in Q1. Kotak forecasted 90 bps QoQ decline in EBIT margin to 25.8 per cent for TCS due to wage increase and operating leverage hit due to revenue decline. It expects flat revenues in a seasonally strong quarter due to weak discretionary spending and project pauses in North America, TCS has announced multiple large deals and mega-deals through press releases. Phillip Capital expets TCS EBIT margins at 23.4 per cent, while HCL Tech's EBIT margins at 18.2 per cent for the June 2023 quarter. It expects TCS EPS growth at 11.5 per cent, while 7 per cent for HCL Tech in FY24.Rating and target price Antique Stock Broking has a and HCL Technologies with a target price of Rs 1,300, while it suggests to hold Tata Consultancy Services with a target price of Rs 3,250. However, Phillip Capital suggests to buy TCS with a target price of Rs 3,890, but remains 'neutral' on HCL Technologies with a target price of Rs 1,150.

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