HCL Technologies gains 3% post March quarter results

HCL Tech's guidance of 18-19 per cent EBIT margin in FY24, despite prevailing uncertainties and larger share of cost take out deals in pipeline, suggests good cost control measures.

Shares of HCL Technologies were up 3 per cent at Rs 1,073.85 on the BSE in Friday’s intra-day trade after the company reported a net profit of Rs 3,983 crore for the fourth quarter (Q4) ended March 31, 2023. The net was up 10.8 per cent year-on-year (YoY). Sequentially, it was down 2.8 per cent.

Revenue for the quarter grew 17.7 per cent YoY at Rs 26,606 crore, although revenue growth was flat sequentially.  The company’s revenue declined 1.2 per cent quarter-on-quarter (QoQ) in constant currency (CC), dragged by seasonal weakness in software business (-14.6 per cent QoQ in CC) along with a sudden ramp down in ER&D vertical (-3.8 per cent QoQ in CC). IT Services, however, grew by a reasonable 1.6 per cent QoQ in CC despite slowing demand environment.

The company guided for a revenue growth range of 6-8 per cent in constant currency (CC). It expects its services revenue growth to be in the range of 6.5-8.5 per cent in CC terms. The growth expectation is much lower than what the company clocked in 2022-23 (FY23).

Earnings before interest tax (EBIT) margin for Q4FY23 (at 18.2 per cent, down 140bp QoQ) was in line and dipped due to seasonal weakness in software business coupled with the adverse impact from revenue decline in ER&D business. Management guided for FY24 EBIT margin to be in the 18-19 per cent range and it maintained its medium term margin aspiration of 19-20 per cent.

HCL Tech has delivered good margin improvement over the last few quarters. Its guidance of 18-19 per cent EBIT margin in FY24, despite the prevailing uncertainties and larger share of cost take out deals in pipeline, suggests good cost control measures. Analysts at Motilal Oswal Financial Services (MOFSL) expect HCL Tech to deliver an FY24 EBIT margin of 18.4 per cent and further improve this to 18.8 per cent in FY25.

Higher exposure to Cloud, which comprises a larger share of non-discretionary spends, offers a better resilience to its portfolio in the current context, with higher demand for Cloud, Network, Security, and Digital workplace services, the brokerage firm said.

“An easing supply scenario and a strong margin trajectory provide comfort on margins for the company. Given its capabilities in the IMS and Digital space along with strategic partnerships and investments in Cloud, we expect HCL Tech to emerge stronger on the back of healthy demand for these services in the medium term,” MOFSL said in its result update.

HCL Tech’s performance for the quarter was largely in line considering some mix change of P&P and ER&D business during the quarter. The company achieved FY23 revenue guidance at the company level. Though It missed services revenue guidance for the year but it is noteworthy that guidance miss for HCL Tech was only 20 bps v/s 60 bps for Infosys, which reflects relatively resilient business footing in a challenging environment where it is flagging pain in discretionary spending, ICICI Securities said in a note.

The company’s valuation discount v/s Infy historically has been around 20 per cent. We believe with stronger growth as well as higher payout (87 per cent vs. 60 per cent for Infosys), the gap is likely to be narrowed in the medium term. EBIT margin guidance reflects some sticky costs in FY24 and P&P lumpiness but in line with peers commentary where they also do not expect accelerated margin expansion despite attrition moderation, the brokerage firm said.