HCL Tech shares may extend gains as brokerages raise EPS estimates on Q3 beat

HCL Technologies has slightly reduced its revenue growth guidance for FY24 from 5-6 percent YoY in constant currency terms to now 5-5.5 percent, though it has maintained its margin guidance of 18-19 percent.

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Shares of HCL Technologies are likely to extend gains for a second day in a row on January 15, with brokerages raising FY24, FY25 and FY26 earnings estimates for the company following a solid beat in Q3 FY24 numbers.

For the December quarter, the HCL Tech reported a 6.23 percent year-on-year (YoY) growth in net profit at Rs 4,351 crore and 6.54 percent YoY in consolidated revenue at Rs 28,446 crore. Both numbers beat Moneycontrol estimates.

Before the results were announced on January 12, the stock had gained 4 percent in anticipation of strong results on the back of ASAP acquisition and Verizon deal.

Also Read: Jio Financial Services Q3 results on Jan 15: Here’s all you need to know

While December quarter is a seasonally weak quarter for Indian IT services companies, HCL Tech is an exception due to its products vertical, as per analysts.

“The growth in revenue was driven by seasonal gains in HCL Software (products and platform), which rose 34 percent sequentially,” said analysts at Motilal Oswal Financial Services.

Meanwhile, the company has slightly reduced its revenue growth guidance for FY24 from 5-6 percent YoY in constant currency terms to now 5-5.5 percent, though it has maintained its margin guidance of 18-19 percent.

Also Read: Avenue Supermarts Q3: D-Mart operator’s net profit rises 17% to Rs 690 crore, revenue up 17.3%

EPS upgrades

After the strong Q3 results and beat, Motilal Oswal has raised FY24-26E EPS by 3-4 percent. “We reiterate our BUY rating with a target price of Rs 1,880. HCLT remains our top pick in the IT Services coverage for 2024. The stock is trading at ~20x FY26E EPS, which offers a margin of safety,” it said.

Nuvama Institutional Equities has also upgraded FY24, FY25 and FY26 EPS by 2 percent, 0.6 percent and 2.7 percent, respectively.

“We continue to value HCL at 23x FY26 PE yielding a target price of Rs 1,780 (earlier Rs 1,700). Retain BUY,” Nuvama’s analysts Vibhor Singhal and Nikhil Choudhary wrote in a note.

Analysts at Morgan Stanley maintained an Equalweight call but raised the target to Rs 1,600 per share from Rs 1,470, highlighting the company’s superior Q3 performance and notable beats in services business and EBIT margins. On the other hand, CLSA downgraded HCLTech to Underperform from Outperform, despite raising the target to Rs 1,536 per share.

Also Read: HCLTech bucks industry trend, headcount up by 3,617 in Q3FY24

Key takeaways from concall

Analysts cheered that the management aspired to achieve and sustain a 20 percent margin trajectory in the longer term. Going ahead, the company is betting big on GenAI.

A key takeaway from the call, as per Emkay Global, is that GenAI holds immense potential and near-term programs in this segment are likely to be small, albeit expected to become sizable in the next 2-3 quarters. HCL Tech has signed 31 deals in Gen AI, most of which are valued at sub-$1 million.

Also Read: Dalal Street Week Ahead: Q3 earnings, Red Sea, China GDP, Europe inflation among 10 key factors to watch

Management does not see an uptick in discretionary spend yet. However, cloud, analytics remains strong, noted Nuvama. “HCL Tech does not see any meaningful change in the demand environment in IT Services while seeing growth momentum in the ER&D (Engineering and R&D) business,” it said.

Over the past one year, HCL Tech stock has outperformed most of its large peers and has gained over 42 percent.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.