HCL Technologies slips 4% on disappointing margin guidance for FY20

The company sees operating margin at 18.50 - 19.50 per cent in constant currency (CC) for the current fiscal.

HCL Technologies slipped 4 per cent to Rs 1,084 on the BSE during the early morning trade on Friday after the company announced a 100 basis point (bps) cut in the estimated operating margin (OM) for FY20 as against FY19. The company sees the OM at 18.50 – 19.50 per cent in constant currency (CC) terms for the current financial year. 

For FY19, the company’s EBIT (earnings before interest and tax) margin stood at 19.5 per cent.

“For FY20, revenue is expected to grow between 14 and 16.0 per cent in CC,” HCL Technologies said in FY20 guidance.

Analysts attributed the downward revision to pressure in Mode 1 services due to investments, on renewals and pressure on cost including that of onsite and digital talent.

Near-term headwinds are likely to keep the organic growth flattish sequentially in 1QFY20 ((backended growth in 2HFY20 likely),  while margin will see a decline on one-time cost of US$25 million to be incurred towards hedging payables, say analysts at Reliance Securities, adding "The IT major is also likely to take on further debt of US$200 million. Clearly, the company is taking a lot of balance sheet risk to drive growth". 

According to analysts at SBICAP Securities, the cut in EBIT margin reflects the company's investments into newer technologies, ramp-up of large deals and pricing pressure in deal renewals, which is likely to exert pressure on margin in Mode 1, adverse business mix with growing revenue from Mode 2 (which is into investment phase) and initial investments in IBM deal in Q1.

“We have lowered FY20E/FY21E earnings estimates by around 5 per cent to factor in FY19 performance, lower margin assumptions and acquisition of Strong-Bridge Envision. Pressure on margin and changing risk profile with growing investments in IPs will weigh on the stock, although the uptick in organic revenue is a positive,” the brokerage firm said with ‘Hold’ rating on the stock.

In the past four months, HCL Technologies has outperformed the market by surging 21 per cent, as compared to 4 per cent rise in the benchmark S&P BSE Sensex till Thursday. The S&P BSE IT index was up 11 per cent during the same period.