Q3 recovery, decent valuations to support HCL Tech's stock

The stock has been underperforming peers over the past couple of months

HCL Technologies has been the worst performer among Tier-1 IT companies over the past two months, declining about 13 per cent from its September high on weak second quarter (Q2) results and guidance cut for the products and platforms segment.

However, the stock has recovered since hitting its low last week (up 7 per cent) after brokerages upgraded it on the back of improved outlook in the services business and attractive valuations.

Analysts at Kotak Institutional Equities, who recently upgraded the stock, believe deal wins that have picked up over the last three quarters will translate into growth. Further, a diversified profile compared with the dependence on infrastructure management services (IMS) in the past offers comfort on durability of growth.

Among the growth triggers for the company are the Cloud and engineering, research and development segments. Analysts at Sharekhan say the company’s strong IMS capabilities, robust partnerships with hyperscalers, and strengths in digital foundation and modern applications could help it capitalise on opportunities in the Cloud space. Sharekhan expects a recovery in Q3 after the muted show over the last three quarters. In Q2, the company disappointed the Street with revenue growth at 2.6 per cent on a sequential basis against the estimate of 4.5 per cent.

Though brokerages have highlighted many triggers, the near-term challenges for the products business will remain. This is on the back of discontinuation of certain products and delay in deal signings. What has compounded matters is the resignation of Darren Oberst, chief executive officer of HCL Software. Motilal Oswal Research believes the leadership attrition in an already challenged business increases the risks to a sustainable recovery. The analysts, however, believe the impact on HCL Tech’s business will not be substantial; a 4 per cent fall in revenues in FY23 will hit earnings by 2.6 per cent.

A lot will depend on the company’s ability to sustain deal wins and a robust growth print in Q3, but valuations at just under 21 times would offer support to the stock. Investors can consider the stock for a medium to long term.