HCL Tech Q1 preview: EBIT margin may dip up to 130 bps, FY20 guidance eyed

Key things to watch out for include updates on the FY20 outlook (the company had guided for 14-16 per cent CC revenue growth), and outlook on business in Europe, Financial and Engineering Services.

HCL Technologies (HCL Tech) is expected to post a revenue growth of up to 2.9 per cent in constant currency (CC) terms when it releases its June quarter results of the financial year 2019-20 (1QFY20) on Wednesday. However, rupee revenue growth is expected to be modest on sequential basis, mainly on account of rupee appreciation. Earnings before interest and tax (EBIT) margins could decline up to 130 basis points (bps) on quarter-on-quarter (QoQ) basis, owing to costs related to IBM acquisition and rupee headwind, according to analysts. 

Key things to watch out for include updates on the FY20 outlook (the company had guided for 14-16 per cent CC revenue growth and EBIT margins in the range of 18.5-19.5 per cent for the year), and outlook on business in Europe, Financial Services and Engineering Services.

"We are building in 1.8 per cent QoQ CC revenue growth with nearly 60bps cross-currency headwinds. We expect nearly 130bps QoQ decline in EBIT margins to 17.7 per cent, adversely impacted by rupee appreciation and transition costs/investments relating to the IBM IP takeover," say analysts at Emkay Global. 

The brokerage expects net profit to decline around 8 per cent sequentially to Rs 2,375.8 crore. On year-on-year (YoY) basis, the numbers are likely to fall 1 per cent.

As per Edelweiss Securities, HCL Tech'revenues will grow 2.7 per cent in US dollar terms and 2.9 per cent in cc terms. "The growth forecast is trimmed because the company will not be realising close to $50 million of revenue which was expected to be on its books by Q1FY20 as a result of the IBM IP acquisitions," analysts at the brokerage firm wrote in a results preview note. 

Last month, HCL Tech confirmed the official close of the previously announced acquisition of select IBM products for security, marketing, commerce, and digital solutions. CLICK TO READ FULL ARTICLE

In rupee terms, the company's revenue for the quarter under review is expected to come in at Rs 16,874.8 crore, up 5.5 per cent QoQ and 21.6 per cent YoY. In US dollar terms, the numbers are likely to come in $2,339, up at 2.7 per cent QoQ and 13.9 per cent on YoY basis. 

EBITDA (Earnings before interest, tax, depreciation and amortisation) is estimated to fall 0.5 per cent QoQ to Rs 3,579.4 crore. On YoY basis, the numbers are likely to grow 11 per cent. EBITDA margin is expected to decline by 130bps QoQ, as HCL makes investments in preparation for the IBM IPs(100bps), Edelweiss Securities said.

PAT (profit after tax) or net profit is projected to fall 7.5 per cent QoQ to Rs 2,383.3 crore. On YoY basis, it is likely to fall nearly a per cent, it added.

In the year-ago period, HCL Tech had posted a 9 per cent YoY increase in net profit at Rs 2,431 crore while revenue in CC terms had risen 5.3 per cent to Rs 13,878 crore. EBIT had risen 5.7 per cent sequentially to Rs 2,729 crore while EBIT margin had contracted marginally to 19.7 per cent from 19.9 per cent.

As per Nirmal Bang Securities, HCL Tech will register zero per cent QoQ CC revenue growth and around 20bps cross-currency headwind resulting in revenue growth of - (0.2) per cent in US dollar terms. Giving the rationale behind this, the brokerage said, "unlike the earlier expectation of one month’s revenue of the acquired IP from IBM, the deal concluded later, thus pushing back revenue into the September quarter."

In the quarter ended June 30, 2019, shares of the company underperformed both S&P BSE Sensex and S&P BSE IT index. During the three-month period, the stock slipped over 2 per cent while the benchmark S&P BSE Sensex gained around 2 per cent. The S&P BSE IT index rose nearly 2.50 per cent, ACE Equity data show.