HCL Tech tanks 3% post Q4 nos but brokerages remain bullish; here's why

Following the March quarter results, most brokerages slashed their earnings expectations from HCL Tech

Shares of HCL Technologies slipped over 3 per cent in Monday's intra-day session after the IT major's March quarter results for the financial year 2020-21 (FY21) missed Street estimates across the board.

Impacted by higher taxes and one-time bonus payment, the company on Friday reported a 6.1 per cent fall in its fourth-quarter net profit at Rs 2,962 crore. The profit was down 25.6 per cent on a sequential basis. The provision for tax nearly doubled sequentially in Q4 to Rs 1,191 crore.

The March quarter revenue, meanwhile, was at Rs 19,642 crore, up 1.8 per cent sequentially and up 5.7 per cent on a year-on-year (YoY) basis. The Noida-based company expects FY22 revenue to grow in double digits in constant currency and expects an Ebit (earnings before interest and tax) margin between 19.0 per cent and 21 per cent.

The firm also reported the highest ever new deal booking this quarter of $ 3.1 billion, a 49 per cent increase annually, with an all-time high exit pipeline.

Following the results, most brokerages slashed their earnings expectations from HCL Tech, resulting in a dip in the stock. However, they remain bullish on the counter on account of inexpensive valuations and the probability of strong growth in FY22.

At 10.11 am, the scrip was quoting at Rs 932.05 on the BSE, down 2.45 per cent. It hit an intra-day low of Rs 924.

"HCL Tech's strong deal wins and step-up in payout ratio was overshadowed by higher tax rates and muted margin guidance. The net result is a 1-3 per cent FY2022-23E EPS cut for us and probably far higher for the Street," said analysts at Kotak Institutional Equities (KIE).

The brokerage although added: "We retain our constructive rating on the stock led by inexpensive valuations, a much-needed uptick in deal wins and consistent wins in integrated deals, a positive shift away from growth driven by a single service line driven the growth of the past." 

 

Strong deal wins and a record-high pipeline provide a solid foundation for FY2022E revenue growth, it said while retaining its 'Add' rating on the stock with a revised target price of Rs 1,080, down 3 per cent from the previous estimate.

Analysts at global brokerage Jefferies too lowered their earnings estimates from but found comfort in valuations and growth opportunity offered by HCL Tech.

"We raise our FY23 revenue estimate by 1 per cent on strong order wins and estimate 11 per cent/10 per cent revenue growth in FY22-23 respectively. However, we lower our earnings estimates by 5 per cent to factor lower margins due to investments and a 100 bps increase in the tax rate as indicated by management. Over FY21-23, we expect HCLT to deliver 11 per cent revenue growth and 9 per cent EPS CAGR. HCL Tech has raised quarterly dividend payout to Rs 6 per share, implying a payout of c.45 per cent, a step in the right direction," Jefferies said.

With stock offering growth and valuation comfort, we maintain 'Buy' with a revised target price of Rs 1,150 based on 21x PE, it added.

Analysts at ICICI Securities and Edelweiss Financial too retained their positive views on the stock with 'Buy' ratings.

"The company witnessed healthy new deal wins (up 18 per cent YoY to $7.3 billion in FY21). This, coupled with traction in the cloud and cloud-related services, expansion in other geographies, investment in sales, inorganic growth and opportunities in captive carve-outs makes us positive on HCL’s revenue trajectory in the long term," said Devang Bhatt, research analyst at ICICI Securities.

The brokerage has a target price of Rs 1,110 (18x PE on FY23E EPS) on the stock.