Jefferies, CLSA, Morgan Stanley retain 'Hold' on HCLTech despite Q3 miss

HCLTech declared a dividend of Rs 18 per share, including a special Rs 6 per share dividend to commemorate 25 years since its public listing, marking its 88th consecutive quarter of dividend payouts

The stock of India’s third-largest information technology services provider, HCLTech, fell as much as 9.41 per cent to hit an intraday low of Rs 1,798 before recovering slightly to end the day at Rs 1,813.95, down 8.63 per cent. In comparison, the BSE Sensex closed 0.22 per cent higher at 76,499.63. The sharp decline in the stock price was due to near-term growth concerns and valuation issues.

 

The company narrowed its 2024-25 (FY25) organic growth guidance to 4-4.5 per cent, compared to 3.5-5 per cent earlier. This guidance includes the impact (50 basis points) of its acquisition of Hewlett Packard Enterprise’s (HPE’s) Communications Technology Group (CTG) assets. The FY25 guidance implies fourth quarter (Q4) FY25 quarter-on-quarter (Q-o-Q) revenue growth of minus 1.3 to 0.6 per cent.

 

The muted growth outlook is attributed to the ramp-down of a large programme in retail, a planned reduction following the anniversary of the Verizon mega-deal (which will also affect the first quarter of 2025-26/FY26 to some extent), and the time needed for the ramp-up of recently won discretionary programmes.

 

Kotak Institutional Equities expects lower growth acceleration compared to select peers due to HCLTech’s portfolio mix and tepid large deal wins in recent quarters. The brokerage has retained its ‘reduce’ rating as the stock trades at full valuations.

 

Jefferies has a ‘hold’ rating with a target of Rs 2,060, acknowledging the higher margins in the third quarter (Q3) but expressing concerns over revenue falling slightly short of estimates and the FY25 growth guidance of 4.5-5 per cent, signalling a weak Q4 outlook, according to reports. 

 

CLSA also maintained a ‘hold’ rating with a target of Rs 1,882. It noted stable demand momentum across smaller deals but raised concerns over the unchanged growth guidance despite slight revisions in FY25 constant currency revenue growth expectations.

 

Morgan Stanley retained an ‘equal-weight’ rating, setting a target price of Rs 1,970. It pointed out that the lower revenue guidance was offset by positive management commentary.

 

Meanwhile, analysts at Nuvama Institutional Equities noted that the results were broadly in line with expectations. They highlighted HCLTech’s superior growth compared to peers, robust free cash flow generation, and strategic capital allocation. However, with the stock trading at 28.5x FY26 price-to-earnings (P/E) estimates, its valuation appears stretched.

 

Consequently, Nuvama revised its FY25/26 estimates downward by 0.6 per cent and 3 per cent, respectively, while rolling forward to 28x FY27E (E = Estimates) P/E. The target price was marginally increased to Rs 2,150 from Rs 2,125, accompanied by a downgrade to a ‘hold’ rating from ‘buy’.

 

Nomura maintained a ‘buy’ rating with a target price of Rs 2,000, citing a strong deal pipeline, HPE’s CTG acquisition, and the potential of generative artificial intelligence to drive growth in areas like technology modernisation, Cloud, and data. It identified downside risks, including unexpected ramp-downs hurting revenue.

 

Similarly, Motilal Oswal reaffirmed its ‘buy’ rating on HCLTech, setting a target price of Rs 2,400. The brokerage anticipates HCLTech achieving earnings before interest and tax margin of 18.2 per cent in FY25, with a recovery to 18.9 per cent in FY26 as growth accelerates. It projects a compound annual growth rate of 7.5 per cent in dollar revenue and 11.7 per cent in profit after tax over FY25 through 2026-27E. The estimates remain largely unchanged, the brokerage said.

 

The Noida-headquartered company’s net profit came in at Rs 4,591 crore in Q3FY25, reflecting an 8.4 per cent Q-o-Q increase and a 5.5 per cent year-on-year (Y-o-Y) growth.

 

Revenue for the quarter stood at Rs 29,890 crore, marking a 3.6 per cent Q-o-Q rise and a 5.1 per cent Y-o-Y increase. The results fell short of Bloomberg estimates, which had projected revenue at Rs 30,035.8 crore and net profit at Rs 4,613.9 crore.