HCL Technologies' December quarter results were a beat across fronts, but the IT major revised its FY23 revenue guidance towards the lower-end of the band. Analysts largely have a neutral stance on the stock, with most price targets suggesting limited upside ahead. HCL Tech's December quarter revenue came in at $3,244 million, up 5 per cent QoQ in constant currency (CC) terms, which was ahead of the Bloomberg consensus estimate of 3 per cent QoQ CC growth. Growth was strong in the software business (12 per cent of revenue) at 30.5 per cent QoQ CC while core services business reported 2.2 per cent QoQ CC growth, Nomura India said adding that EBIT margin at 19.6 per cent was also ahead of consensus’ 18.7 per cent estimate, led by a strong 160 bps jump in IT software margin.
Nomura, however, prefers Infosys over HCL Tech. It has a target of Rs 1,140 on HCL Tech.
HCL Tech, said Nirmal Bang, indicated that March quarter should see softness on a sequential basis likely due to a big seasonal dip in P&P revenues. Nirmal Bang said the management sounded optimistic on the medium growth picture though, it dropped hints that there could be a few soft quarters in the foreseeable future.
"We felt it was in the same camp as TCS and seems to be assuming that there is going to be a no-recession situation in the US in CY23. The positive view also likely stems from a rather strong net new order inflow that the company has seen in the last few quarters (relative to its size). There is also a great deal of optimism around the vendor consolidation opportunity. While FY23 is in the bag, we believe that growth will materially slowdown in FY24," it said.
Nirmal Bang said will also feel the negative impact of the stagflationary environment developing in the western world, which will likely affect tech spending in FY24, Nirmal Bang said adding that while HCL is up against the entire Tier-1 peers & MNC players in the area of cost optimisation, as macro deteriorates, it sees clients would want to squeeze pricing on this part of their spend.
YES Securities has a target Rs 1,181 on HCL Tech. It said the long-term demand story remains intact led by IT transformation and cost optimisation projects, but macroeconomic factors in the US and Europe remain concerning that is reflected in clients being more watchful of the situation.
"Consequently, we expect moderation in growth in the near term. HCL Tech is well on track to meet its targeted 18-18.5 per cent EBIT margin guidance for FY23. We estimate revenue CAGR of 16.2 per cent
over FY22‐24E with average EBIT margin of 18.7 per cent. We maintain our ADD rating on the stock with revised target price of Rs 1,181/share at 18.5x on FY24E EPS. The stock trades at PE of 19.6 times/16.8 times on FY23E/FY24E EPS," it said.
Emkay Global said it has raised HCL tech earnings estimates by 1.4-1.8 per cent for FY23E-25E, factoring in Q3 performance. It has a target of Rs 1,125 on the stock compared with Rs 1,100 earlier. Motilal Oswal sees the stock at Rs 1,270 while Nuvama Institutional Equities finds the stock worth Rs 1,220.
Kotak Institutional Equities has a fair value of Rs 1,280 on the stock. It said HCL tech's revenue and margin beat estimates due to strong qoq growth in products in a seasonally strong quarter. Services business performed in line with expectations, it said.
"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. We upgrade EPS and retain BUY," it said.
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