HCL Tech shares fall after Q3 results, dividend announcement. Here's why

Shares of HCL Technologies (HCL Tech) were trading 3 per cent lower in Friday's trade, even as the IT major reported a strong set of results for December quarter and also announced 80th quarterly dividend in a row. Analysts said the IT Services and ERD segments remained soft and that the growth was primarily driven by the strong performance by Products & Platforms (P&P) segment.

Besides, as Nirmal Bang noted, the revenue growth guidance for FY23 has been narrowed to 13.5-14 per cent in CC terms from 13.5-14.5 per cent indicated post Q2FY23 results, on the back of higher-than-expected furloughs in the Services business. HCL Tech also narrowed its EBIT margin guidance to 18-18.5 per cent from 18-19 per cent.

"While we see strong sustainable demand (transformational/cost-takeout deals) driving growth for the sector – HCL Tech is likely to underperform peers, primarily due to its unfavourable business mix (33 epr cent revenue from P&P and ERD). Inexpensive valuations and high dividend yield limit the downside potential," said Nuvama Institutional Equities while suggesting a target of Rs 1,120 on the stock.

Nirmal Bang, which has a sell rating on the whole IT sector, said HCL Tech delivered CC QoQ revenue growth of 5 per cent, much above the 3 per cent growth that it was estimating. This, it said, was largely driven by the 30.5 per cent QoQ growth delivered by HCLT Software (P&P business).

"We believe that HCL Tech will also feel the negative impact of the stagflationary environment developing in the western world, which will likely affect tech spending in FY24. In the area of cost optimisation, HCL Tech is up against the entire Tier-1 peers & MNC players and as macro deteriorates, we see clients wanting to squeeze pricing on this part of their spend," it said while suggesting a target of Rs 847 on the stock.

Kotak Institutional Equities, however, believes that a more balanced portfolio mix with momentum in apps and decent positioning in vendor consolidation and cost take-out mandates can offset vulnerability in ERD and products portfolios, and drive industry-matching growth, even in a slowdown phase for tech spending. This brokerage has a target of Rs 1,280 on the stock.

Motilal Oswal Securities is also positive on HCL Tech's prospects. Given HCL Tech's capabilities in the IMS and digital space and strategic partnerships and investments in cloud, it expects HCL Tech to emerge stronger on the back of an expected increase in enterprise demand for these services.

"The stock is trading at 15 times FY24E EPS, which offers a margin of safety. Our TP is based on 20x FY24E EPS. We reiterate our Buy rating," it said.

The C Vijayakumar-led company had on Thursday reported a 19 per cent year-on-year (YoY) rise in net profit at Rs 4,096 crore for the December quarter compared with Rs 3,442 crore in the same quarter last year. The IT major said its revenue for the quarter jumped 19.6 per cent YoY to Rs 26,700 crore compared with Rs 22,331 crore in the year-ago quarter. Dollar revenue for the quarter stood at $ 3,244 million, up 5.3 per cent QoQ and 9 per cent YoY Revenues in constant currency terms climbed 5 per cent QoQ and 13.1 per cent YoY.

EBIT margin for the quarter came at 19.6 per cent, up 165 basis points sequentially.

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