Brokerages raise target price for HCLTech after solid Q1 performance

Shares of HCL Tech zoomed 4.83 per cent at Rs 1635.85 per share on the BSE in Monday's early morning trade. This came after the IT services major reported a 20.4 per cent year on year increase profits

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Shares of HCL Tech zoomed 4.83 per cent at Rs 1635.85 per share on the BSE in Monday’s early morning trade. This came after the IT services major reported a 20.4 per cent year on year (Y-o-Y) increase in its net profits to Rs 4,257 crore in the April-June Quarter of fiscal year 2024-25. The profits grew 6.8 per cent sequentially.

According to analysts, a $69 million gain from the State Street joint venture's divestment led to a net profit beat. 

Revenue for the quarter stood at Rs 28,057 crore, marking a Y-o-Y growth of 6.7 per cent. However, on a sequential basis, revenue declined marginally by 1.6 per cent.

HCL Technologies' Q1 performance exceeded Bloomberg's estimates, with revenue slightly surpassing the estimated Rs 28,024 crore and net profits exceeding the estimated Rs 3,845 crore.

The sequential revenue decline was led by the ER&D segment falling 3.5 per cent in constant currency (CC) terms followed by the IT Services business slipping by 1.5 per cent.

According to analysts, the decline in IT Services was along expected lines–due to higher offshoring at one of the BFSI clients while ERD was affected by weakness in auto and productivity benefits being passed on to customers. While most other verticals reported Q-o-Q growth, led by the Telecom vertical. 

The company’s new deal wins were solid at $1.96 billion up 25 per cent Y-o-Y, while down 14 per cent Q-o-Q. 

Those at Kotak Institutional Equities said that volatility in deal wins will lead to minor growth deceleration in FY2025, adding that deal wins need stepping up to drive growth acceleration; the company has been reliant on its Verizon deal for growth over the past 2-3 quarters. 

The management has maintained FY25 revenue growth guidance of 3–5 per cent CC Y-o-Y for overall and IT Services. It expects to return to sequential growth in Q2 despite 80 bp impact of the divestment of State Street subsidiary.

HCLT anticipates growth momentum in the core business to continue to be driven by execution of deals won over the last few quarters, said analysts at Nuvama Research. 

“HCLT's sharp re-rating has been driven by higher growth than peers and rectification of its capital allocation policy—fundamentals that shall sustain in FY25 too. It is currently trading at a 5 per cent discount to Infosys–versus historical discount of 15–20 per cent – justified, to a large extent, by its higher growth in FY24 as well as higher growth expectations in FY25. We remain positive on HCLT,” Vibhor Singhal, Nikhil Choudhary and Yukti Khemani wrote in a report.

The brokerage maintained its ‘Buy’ rating for HCL Tech with a target price  of Rs 1,800 from Rs 1700 earlier.

Analyst at KIE, advising adding the stock with revised fair value of Rs 1,675 from Rs1,600 earlier.

“We expect HCLT to have a fair participation in discretionary spending recovery when it occurs, given a mix increase toward the same in the past few years. Stock has moved up 34 per cent in the past one year and limits a further upside to an extent,” analysts at KIE wrote in a report. 

Similarly, the Japanese brokerage firm Nomura also upgraded its target price for the IT major to Rs 1,720 with a ‘Buy’ call.
It believes that HCL Tech is largely on track to achieve FY25F revenue growth guidance.