Brokerages positive on HCL Tech as co ups FY23 revenue outlook; stock up 4%

Shares of HCL Technologies gained 4 per cent at Rs 987.75 on the BSE in Thursday’s intra-day trade after the information technology (IT) services major on Wednesday raised its full-year revenue growth guidance to 13.5-14.5 per cent, from 12-14 per cent on a constant currency (CC) basis, citing strong order bookings and pipeline. The services revenue is expected to grow 16–17 per cent YoY in FY23, according to the company’s guidance.

At 09:16 AM, the stock traded 2.5 per cent higher at Rs 975, as compared to 0.14 per cent decline in the S&P BSE Sensex. The stock had hit a 52-week low of Rs 875.65 on August 29, 2022.

HCL Technologies delivered a strong revenue growth of 3.8 per cent QoQ CC in Q2FY23 (100bp above our estimates), led by IT services & ER&D verticals. Overall services grew 5.3 per cent in CC terms and it reported robust new deal TCV of USD 2.4 billion (+16 per cent QoQ/+6 per cent YoY).

In rupee terms, HCL Tech reported a consolidated net profit of Rs 3,489 crore for the quarter ended September 2022 (Q2FY23), an increase of 7.09 per cent year-on-year (YoY) on the back of new order wins. The revenue of the IT firm grew 19.5 per cent to Rs 24,686 crore, against Rs 20,655 crore a year ago. Its services business grew 18.9 per cent YoY, led by strong demand for cloud, engineering, and digital services, the IT major said.

On a sequential basis, HCL’s net profit saw a 6.3 per cent increase from Rs 3,283 crore in the previous quarter. The revenue jumped 5.2 per cent against Rs 23,464 crore in Q1FY23.

Also read: HCLTech restructures the top management with a new COO and CHRO

Further, it delivered a strong beat in EBIT margin at 18.0 per cent (+100 bp QoQ) with IT services up 100bp QoQ, ER&D up 270bp QoQ, while P&P down 220bp QoQ. HCLT revised its EBIT margin guidance to 18- 19 per cent from 18-20 per cent.

This strong growth guidance and margin performance (despite wage hikes) in an environment, where the demand for IT services is expected to be incrementally weaker, should help improve investor confidence on its business and lower the valuation gap with larger Tier 1 IT services peers. Analysts at Motilal Oswal Financial Services continue to see HCL Tech’s defensive business as a positive in a demand constrained environment.

Given its capabilities in the IMS and Digital space and strategic partnerships, investments in Cloud, the brokerage firm expects HCL Tech to emerge stronger on the back of an expected increase in enterprise demand for these services. HCL Tech’s IT services growth guidance is much ahead of Infosys for FY23. On the demand side, it is not seeing any slowdown on tech spending as clients continue to spend on both revenue enhancements as well cost optimisation programs, ICICI Securities said in a note.

The company has reported strong growth in IT services (four out of last five quarters, it has reported 5 per cent plus CC QoQ growth) driven by continued strong order book. The company aspires to win TCV of US$2-2.5 billion every quarter, which is expected to provide revenue visibility ahead. Pricing (it has taken price hike on all existing as well new contracts since January 2022) along with easing of attrition, moderation of subcontractor costs, utilisation is expected to help it to achieve margins in the guidance band, the brokerage firm said.