HCL Tech hits 52-week high, rallies 6% in 4 days; stock nears record high

Shares of HCL Technologies hit a fresh 52-week high of Rs 1,331.25, up nearly 2 per cent on the BSE in Monday's intraday trade, in an otherwise range-bound market. In the past four trading days, the stock of the information technology company has rallied 6 per cent. It is inches away from its record high level of Rs 1,377.75, touched on September 24, 2021.

In the past three months, HCL Tech has outperformed the market by surging 13 per cent as the company’s earnings before interest and taxes (Ebit) margins improved by 150 basis points to 18.5 per cent in the September quarter (Q2FY24) from 17 per cent in the June quarter (Q1FY24). By comparison, the S&P BSE Sensex was up 1.3 per cent during the same period.

In Q2FY24, new deal total contract value (TCV) stood at $3,969 million, and was up 153.6 per cent quarter-on-quarter (Q-o-Q) and 66.5 per cent year-on-year (Y-o-Y) with 16 new order wins.

HCL Tech expects H2FY24 (October to March) traction to be driven by ramp-up of large deals and strong seasonality in the software business, which might be partly offset by discretionary project roll-offs. It, however, sees pipeline to remain healthy, albeit down Q-o-Q, due to mega deal conversion.

Looking ahead, based on the bookings and all the deals that the company has signed, the management expects very healthy growth in Q3 and Q4. On the operating margins, the management is confident that the company would be able to come within its stated guidance of 18 per cent to 19 per cent for the financial year 2023-24 (FY24).

That said, HCL Tech’s Q2FY24 revenue missed management's expectations on incremental weakness in discretionary demand. Accordingly, HCL Tech has cut its FY24 revenue growth guidance to 5-6 per cent Y-o-Y in constant currency terms (organic 4-5 per cent; 6-8 per cent earlier).

"Growth could pick up by Q4FY24, which should set HCL Tech well for an outperformance in FY25 in our view," analysts at BNP Praibas said. Additionally, an FY25 dividend yield of 5 per cent gives valuation comfort to us, the brokerage firm said in a result update.

"Improving profitability, prudent capital allocation, healthy cash generation, and ~4 per cent plus dividend yield provide cushion, in our view. Accelerated deal velocity, lower attrition, and software business improvement are upside risks. Weak execution is a key downside risk," analysts at InCred Equities said in result update.