HCL Tech Q4 preview: PAT may drop 26-31% QoQ on one-time bonus impact

Contribution from DWS Limited - a leading Australian IT, business and management consulting firm that HCL Tech acquired recently - demand in areas of digital foundation projects and improving traction in ER&D segment should aid HCL Technologies' (HCL Tech's) March quarter performance.

Leading brokerages expect the company to post a 6.2-6.5 per cent year-on-year (YoY) rise in revenue for the fourth quarter of the financial year 2020-21 (Q4FY21) when it announces its numbers on April 23.

However, on account of a one-time bonus impact, the IT company's March quarter profit after tax (PAT) is expected to plummet between 26-31 per cent quarter-on-quarter (QoQ), analysts say. The figure, according to consensus estimates, could contract by 6.5-13 per cent on a yearly basis.

Ebit (earnings before interest and tax) margins are also expected to decline. Deal win momentum, however, remains robust though participation and conversion in large deals have been weak, brokerages said. 

FY22 guidance update, outlook on ER&D and products business, deal TCVs and pipeline, and recent acquisitions are some of the key monitorables that investors are likely to track. Brokerage Phillip Capital expects FY22 growth guidance of 10-12 per cent in CC (constant currency) terms while Emkay Global pegs the same at 11-13 per cent.

Here's what top brokerages expect from HCL Tech's March quarter numbers:

Phillip Capital

Brokerage Phillip Capital expects HCL Tech's Q4 PAT to decline 12.8 per cent YoY to Rs 2,748.2 crore while on a QoQ basis, the fall is likely to be as steep as 31 per cent.

HCL Tech's PAT stood at Rs 3,153 crore in the March 2020 quarter and Rs 3,981 crore in the December quarter of FY21.

The brokerage, however, eyes an expansion in the revenue (rupee terms) by 6.5 per cent YoY to Rs 19,797.9 crore as against Rs 18,590 crore posted in the same period last year. Meanwhile, sequentially the figure could rise by 2.6 per cent from Rs 19,302 crore posted in the preceding quarter.

In dollar terms, Philip Capital pegs revenue growth at 6.8 per cent YoY and 3.8 per cent QoQ to $2,715 in comparison with $2,543 reported in the corresponding quarter of FY20 and $2,617 in the December quarter of FY21. We expect a positive cross-currency impact of 70bps, leading to CC revenue growth of 3.1 per cent sequentially, the brokerage said.

HCL Tech announced Rs 7 billion one-time bonus in February 2021 to celebrate $10 billion revenue milestone which brokerage believe will result in margins impact of 360 bps. "Margins excluding one-time bonus are expected to decline by 190 bps QoQ to 21 per cent on wage hike impact and weakness in the product business," it added.

For Q4FY21, Phillip Capital pegs Ebit (earnings before interest and tax) margin at 17.4 per cent versus 20.9 per cent in Q4FY20 and 22.9 per cent in Q3FY21.

Kotak Institutional Equities (KIE)

Analysts at KIE project profit for March 2021 quarter at Rs 2,800.3 crore, down 11.2 per cent on a yearly basis and 29.7 per cent sequentially.

"HCL Tech's Rs 7 billion one-time bonus will impact Ebit margin by 380 bps and net profit by 18 per cent. We expect adjusted net profit of Rs 34 billion, a YoY growth of 8 per cent. However, reported net profit will decline steeply on QoQ and YoY comparison," the brokerage said.

It expects March quarter revenue (rupee terms) to rise by 6.2 per cent YoY to Rs 19,748.7 crore, led by led by IT and ERD services. Sequentially, it could increase by 2.3 per cent.

In dollar terms, revenue growth is seen at 6.7 per cent YoY and 3.7 per cent QoQ to $2,713. "We forecast CC sequential revenue growth 3 per cent, at the upper end of the guidance band. We expect DWS acquisition to contribute ~1.1 per cent to revenues," it said.

It expects Ebit margin of 21.1 per cent for the March quarter, down 180 bps, QoQ due to wage revision, reinvestment and lower revenue contribution from high margin products business. This is excluding the impact of a one-time bonus.

Lastly, KIE expects investor to focus on large deal wins. "HCL Tech has disappointed with marginal growth in bookings for 9MFY21 as compared to the corresponding prior period. Capital allocation will be another area of focus. The company did increase quarterly dividend to Rs 4 per share from Rs 2 earlier though the overall ratio materially lags peers," brokerage said in an earnings preview note.

JM Financial

The brokerage eyes an 8.8 per cent YoY contraction in the fourth quarter net profit to Rs 2,874.2 crore. While on a QoQ basis, the figure is expected to plummet by 27.8 per cent.

Analysts at JM Financial, in tandem with other brokerages, eye a 6.4 pr cent YoY and 2.5 per cent QoQ expansion in revenue (rupee terms) to Rs 19,775.2 crore during the quarter under review. Meanwhile, dollar revenue for the same period is seen at $2,709, up 6.5 per cent yearly and 3.5 per cent quarterly.

"Ebit margins are expected to decline by 510 bps sequentially due to the one-time bonus announced in February, wage increments, seasonal weakness in the products business as well as the absence of one-time benefits accrued in 3QFY21 due to one-time revenue gains in Mode 2 and ER&D segments," the brokerage said.

The brokerage pegs Q4FY21 margins at 17.8 per cent, down 310 bps YoY.

Emkay Global

Amid one-time special bonus and absence of tax reversals, March quarter PAT is likely to decline by 26 per cent QoQ to Rs 2,945.1 crore, the brokerage said. On a YoY basis, the figure could slip by 6.6 per cent.

Revenue (rupee terms), meanwhile, could grow to Rs 19,801.3 crore, up 6.5 per cent YoY and 2.6 per cent QoQ. "We build in 3.8 per cent QoQ dollar revenue growth, with around 80bps cross-currency tailwinds. It has guided for 2-3 per cent CC QoQ growth," the brokerage said.

The brokerage further added: We expect Ebit margins to decline by around 440bps due to the second round of wage hike (80-90 bps impact) and one-time special bonus (around 350bps) impact.

It expects 11-13 per cent CC YoY revenue growth guidance and 20-21 per cent Ebit margin guidance.