Brokerages alarm caution as HCL Tech Q1 earnings lag estimate on all fronts; stock slips 2%

Shares of information technology major HCL Technologies tumbled over 2 percent in early trade on July 13, a day after the company reported a disappointing set of earnings for the April-June quarter.

The IT major’s Q1 earnings missed the Street’s estimate on all three fronts of profit, revenue and profitability. Even though the company recorded a 7.6 percent year-on-year growth in net profit for the April-June quarter to Rs 3,534 crore, it witnessed a decline of 11.2 percent sequentially. The bottomline was also below analysts estimate of Rs 3,782 crore for the quarter under review, dragged down by a slowdown in deals and verticals like Hi-tech and telecom.

The topline also missed the estimate of Rs 26,858 crore as it came at Rs 26,296 crore, up 12 percent on year. On a sequential basis, revenue also slipped 1.2 percent.

Earnings Before Interest Tax (EBIT) margins came at 16.9 percent, also below the forecasted 17.7 percent. On a sequential basis as well, it was 130 basis points lower than the 18.2 percent recorded in the previous quarter.

At 09.28 am, shares of HCL Technologies were trading with a cut of 1.1 percent at Rs 1,098.90 on the National Stock Exchange.

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Tracking the weaker-than-expected earnings of India’s third largest IT services firm, brokerages have also alarmed caution for the coming quarters.

Global research and boking firm Bernstein, which has a ‘market-perform’ rating for HCL Tech with a price target of Rs 1,000 believes the company’s guidance remains at risk following the weaker-than-expected Q1 earnings. HCL Tech has given a YoY revenue growth guidance of  6-8 percent for FY24, compared to 12-14 percent in FY22-23.

However, Bernstein feels the guidance is at risk as it expects a CAGR (Compounded annual growth rate) of 3.2 percent for the IT company in a difficult macro environment.

Nomura also seconded that view as it believes that achieving the top end of the growth guidance could be challenging for the company. Moreover, the firm also lowered its FY24-25 EPS estimate for HCL Tech by 1 percent to factor in the earnings miss in Q1. The brokerage has a ‘neutral’ rating for HCL Tech with a price target of Rs 1,090 per share.

Also Read: HCLTech Q1 Results: Net profit rises 8% YoY to Rs 3,534 crore; revenue up 12%

Another brokerage, JP Morgan was also negatively surprised by the cuts in discretionary tech spends, which resulted in project ramp downs for the IT company. JP Morgan has an ‘underweight’ call on HCL Tech with a price target of Rs 900.

On the other hand, domestic brokerage Nuvama Institutional Equities has a slightly more optimistic view for HCL Tech. Though the firm does believe that a weak performance in Q1 makes meeting its FY24 guidance a tall ask for HCL Tech, it feels that the company will still remain  one of the fastest growing large-cap IT majors even if it misses its guidance.

“HCL Tech’s strong growth in services and lower exposure to the troubled BFSI segment imply high probability of stable earnings growth,” Nuvama stated in its report. In addition, the firm believes a high dividend yield and inexpensive valuation makes the stock attractive at current levels, as it assigned a ‘buy’ call to it with a target price of Rs 1,300.

Motilal Oswal Financial Services also reiterated that view as the firm believes the scrip’s inexpensive valuations provides a margin of safety, factoring in the weak quarterly performance. On that account, MOFSL also rolled out a ‘buy’ call for HCL Tech, with a price target of Rs 1,280.

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