HCL Tech dips 6% in 2 days, hits 52-week low ahead of June quarter results

Analysts expect Ebit to contract sequentially due to increase in retention costs as well as higher travel costs

Shares of HCL Technologies hit a 52-week low of Rs 927.10, down nearly 2 per cent on the BSE in Tuesday’s intra-day trade, thus falling 6 per cent in two trading sessions, ahead of its April-June quarter (Q1FY23) results due later in the day.

In the past three months, HCL Technologies has underperformed the market by falling 18 per cent, as compared to a 7.5 per cent decline in the S&P BSE Sensex. Further, in six months, the stock has dipped 31 per cent as against a 11 per cent fall in the benchmark index.

Analysts expect HCL Technologies to post a muted performance in a seasonally weak quarter. Earnings before interest and tax (Ebit) margins for the quarter are expected to contract around 100 bps sequentially due to increase in retention costs as well as increase in travel costs.

"We expect Product and Platforms (P&P) business to report single digit decline while IT services and ER&D to report a modest 2-2.5 per cent QoQ CC growth. On account of around 60 bps cross currency headwinds, we expect the company to report 1.4 per cent QoQ growth in dollar term. In Rupee terms, the company is expected to report revenue growth of 3.7 per cent QoQ," ICICI Securities said in its result preview.

The brokerage firm expects margins to contract QoQ due to wage hike and continued rationalisation of employee costs amid high attrition despite the industry continuing to add record freshers.

The attrition across companies would continue to be high and, hence, cost to backfill attrition (at higher costs) and costs related to retention, bonus, rationalisation of compensations are expected to put pressure on margins. This quarter margins also would be impacted due to uptick in travel expenses as the economy opens up and visa related costs, ICICI Securities said.

Meanwhile, with valuations correcting meaningfully over the last six months, Motilal Oswal Financial Services maintains a positive stance on the IT Services sector due to a favorable medium to long term demand outlook. The brokerage firm expect near-term pressure on valuations to continue as the worsening macro commentary is expected to flow down to industry deal flow and revenue over the next few quarters, leading to a moderation in corporate commentary. Any consequent correction should be utilized to raise allocation to sector, in our view, it said.

HCL Technologies is one of the key beneficiaries of Cloud adoption at scale, given its expertise in IMS. “The company’s Q1FY23E CC growth will be good due to deal conversion in IT services and P&P seasonality. Core Services business will see some growth moderation, but should deliver 2.5 per cent QoQ CC growth,” the brokerage firm said in results preview. Margin in Services to remain stable vs Q4FY22 levels, but overall profitability will stay below guidance. Outlook on Services and the P&P business in FY23 will be key monitorables, it said.

Technical View

Bias: Negative

Pivot: Rs 942

Support: Rs 900, Rs 885

Resistance: Rs 975, Rs 1,025

The stock has been on a downtrend since mid-March and has shed almost 23 per cent during this period. Currently, the stock is trading a tad below its lower-end of the Bollinger Band on the daily chart placed around Rs 942.

The short-term bias is likely to favour bears as long as the stock sustains below Rs 942, beyond which the stock can slide towards the Rs 900-mark. Further, Rs 885 is the super trend line support on the monthly chart.

On the positive front, in case the stock is able to sustain above Rs 942, a pullback to Rs 975-odd level, followed by Rs 1,025 seems possible.

(Inputs from Rex Cano)