HCL Tech down 3% as investors turn cautious on lowered revenue guidance

Despite strong performance in Q3, management lowered guidance in services and total revenue growth indicating weak Q4FY23.

Shares of HCL Technologies declined 3 per cent to Rs 1,042 on the BSE in Friday’s intra-day trade as the management despite strong performance in December quarter (Q3FY23) narrowed its guidance in services and total revenue growth indicating weak March quarter (Q4FY23).

Information technology (IT) services company cut revenue guidance by 50 bps for FY23. The company revised its revenue guidance to 13.5 per cent to 14 per cent, down from the earlier 13.5 per cent to 14.5 per cent due to seasonal weakness expected in the Q4FY23.

However, prior to Q3 results, in past four trading days, the stock had rallied 4 per cent, in an otherwise weak. At 09:53 AM; the stock quoted 2 per cent lower at Rs 1,051, as compared to 0.35 per cent decline in the S&P BSE Sensex.

India’s third-largest IT services firm HCL Tech reported a strong quarter with a net profit of Rs 4,096 crore for Q3, FY23, an increase of 18.8 per cent compared to the same period last year, against a weak global macroeconomic environment. READ MORE

The net consolidated revenue of the company grew 19.6 per cent to Rs 26,700 crore, compared to Rs 22,331 crore a year ago. The IT and business services segment, the largest contributor to the IT major’s revenue, grew 15.3 per cent year-on- year (YoY).

HCL Tech delivered a revenue growth of 5 per cent quarter-on-quarter (QoQ) constant currency (CC) in Q3FY23. IT Services grew by 2.2 per cent in CC terms with a robust new deal TCV of USD 2.3 billion (flat QoQ/+10 per cent YoY).

HCL Tech’s margin improvement over Q2FY23 and Q3FY23 despite wage hikes has been reassuring, and the company should continue to improve margins in FY24 as well. We expect HCLT to deliver FY23 margin near the mid-point of its guidance, and further improve to 18.7 per cent in FY24, Motilal Oswal Financial Services said.

The strong growth guidance and margin performance in an environment, where demand for IT services is expected to be incrementally weaker, should boost investor confidence on HCL Tech’s business and lower the valuation gap with larger Tier-1 peers. We continue to see HCL Tech’s defensive business as positive in a demand-constrained environment, the brokerage firm said in result update.

HCL Tech’s strong performance for the quarter was aided by a rebound in seasonally strong P&P business. However, IT services performance was down as it was impacted by higher-than-expected furloughs. The lower IT services growth and seasonally weak Q4 for P&P business could be the reason for revenue guidance cut by 50 bps by the company for FY23 but we believe that 50 bps guidance cut is not alarming, ICICI Securities said in a note.

The company is playing on the $115 billion vendor consolidation opportunity, which is coming up in the next two to three years where it is likely to be one of the beneficiaries. The company indicated that large deals in BFSI were not abundant historically as the sector spending on technology was relatively lower compared to other verticals but now it has seen some acceleration there. This could provide an incremental revenue opportunity ahead. On the margin front, supply side easing is likely benefit in the medium term along with pyramid optimisation and pricing, the brokerage firm said.

Overall, it was a solid Q3 reported by HCL, but uncertain outlook on Products and ERD business – 29 per cent of revenue makes us cautious. At 18.4x FY24 PE, valuations remain relatively inexpensive. We maintain NEUTRAL, analyst at Phillip Capital said.