Brokerages bullish on HCLTech despite weak FY25 guidance; stock falls 6%

IT company HCL Technologies (HCLTech) plunged as much as 6.10 per cent to Rs 1,382.45 apiece, after it reported a muted quarter-ending March results (Q4FY24), coupled with weak financial year 2025 (FY25) guidance.

At 10:00 AM, the stock was the top loser on 30-share Sensex. By comparison, S&P BSE Sensex was up 0.37 per cent at 74,002.66 levels.

Analysts attributed the lacklustre performance to seasonal fluctuations in HCL Software, which experienced an 18.5 per cent quarter-on-quarter (Q-o-Q) decline in constant currency (CC) revenue, along with weakness in the Engineering and R&D Strategy, Services & Solutions (ERS) segment.

Trims guidance

HCLTech has revised its revenue growth guidance for FY25 to 3-5 per cent in constant currency, citing weak expectations for the first quarter of FY25 due to the offshoring of a large deal and the transfer of productivity benefits to clients.

"3-5 per cent revenue growth guidance for FY2025 is based on—(1) revenue decline of 2 per cent in Q1FY25 due to impact of usual productivity gains in annuity deals and additional impact of offshoring of a large deal that ramped up from March 2023 and (2) 1-2.5 per cent Q-o-Q growth during Q2-Q4FY25. HCLT has additional headwind of approximately 1 per cent from divestment of stake in JV to State Street in Q2FY25. In a way, growth guidance is back-ended,” said Kotak Institutional Equities.

That apart, despite reporting a consolidated revenue from operations of Rs 28,499 crore, up 7.1 per cent year-on-year, and a marginal sequential increase, the company's earnings before interest and taxes (Ebit) margin fell short of analysts expectations, primarily due to seasonal factors affecting HCL Software.

However, the management retained its Ebit margin guidance band of 18-19 per cent for FY25. 

Overall,  the company's profit for the quarter-ending March remained stagnant at Rs 3,995 crore compared to the previous year's Rs 3,981 crore. However, there was a sequential decline of 19.3 per cent, from Rs 4,951 crore in the preceding quarter (Q3).

Total income for the March quarter increased nearly 7 per cent to Rs 28,915 crore compared to the same period last year.

Notably, the attrition rate decreased to 12.4 per cent from 19.5 per cent a year ago. The board of directors declared an interim dividend of Rs 18 per equity share for the financial year 2024-25.

While the company anticipates robust growth for FY25 driven by healthy deal wins and a strong fourth-quarter exit, it acknowledges weaker growth expectations for the first quarter and the impact of divesting the State Street business in the second quarter of FY24.

That said, despite the near-term pressure on the stock due to weak FY25 revenue growth guidance, Motilal Oswal analysts remain optimistic about HCLTech's performance relative to its peers, reiterating it as a top pick for FY25. The analysts adjusted earnings estimates downward by 6-8 per cent for FY25-26 and maintained a ‘Buy’ recommendation with a target price of Rs 1,700, based on 23x FY26E EPS.

On the other hand, Prabhudas Lilladher have initiated coverage on HCL Tech with "accumulate" rating as it believes that given its defensive business mix and resilient vertical portfolio, HCL Technologies is well positioned to capture the broader market theme and participate in the critical aspects of enterprise operations. 

The valuation gap, they said, is quite meaningful between 1-year forward PE (23x) and its 10-year median (16x). Any correction from here, otherwise, would make the valuations even more attractive. 

“We are baking in US Dollar revenue growth of 4.5 per cent and 9.5 per cent Y-o-Y with margin improvement of 10 bps and 80 bps for FY25 and FY26, respectively. The stock is currently trading at 21x FY26e, and we assig PE of 22x to FY26 with a target price of Rs 1,550,” it added.