HCL Tech gains 3% on maintaining margin outlook; analysts remain positive

Motilal Oswal Financial Services expects HCL Tech to emerge stronger on the back of healthy demand for IMS, Digital space and Cloud services in the medium term

Shares of HCL Technologies rallied 3.4 per cent to Rs 1,266 on the BSE in Friday's intraday trade, in an otherwise weak market, after the company reported a 9.8 per cent year on year (YoY) jump in its consolidated net profit at Rs 3,832 crore for the second quarter of FY24 (Q2-FY24). The stock had hit a 52-week high of Rs 1,311 on September 18, 2023.

The consolidated revenue from operations reached Rs 26,672 crore, an 8 per cent YoY increase. Sequentially, profit after tax grew by 8.4 per cent, while revenue increased by 1.4 per cent. Earnings before interest and taxes (Ebit) margins of HCL Tech improved by 150 basis points to 18.5 per cent from 17 per cent in Q1-FY24.

However, the information technology (IT) services major has revised its full-year 2023-24 (FY24) revenue guidance to 5-6 per cent YoY growth in constant currency (CC) terms due to weak performance in the first half of the year. This is down from the earlier estimate of 6-8 per cent, and a growth of 13.7 per cent in 2022-23 (FY23).

The company reported net new bookings in the quarter at an all-time high of $3.96 billion in total contract value (TCV). This includes a large deal worth $2.1 billion signed with the telecommunication major Verizon Business in August.

On LTM (last twelve months )basis, net-new deal TCV increased 12.7 per cent. The company’s deal pipeline remains at healthy levels (marginally lower from the peak), even after strong conversion during the quarter. The pipeline buildup has been aided by continued reprioritisation of spends by clients toward efficiency and cost optimisation mandates.

Deal wins and healthy levels of pipeline, analysts said, provide comfort on improved revenue growth in FY25. However, an uptick in discretionary spends is required to meet expectations of double-digit revenue growth in FY25, they added.

On its part, HCL Tech management noted that while discretionary demand has been hit and the first half of FY24 (H1) was softer than expected, the ramp-up of recently won deals, strong seasonality in products (in Q3) and strong pipeline should help it have a stronger H2.

Ebit margin improved by 150bp QoQ to 18.5 per cent, beating our estimate by 80bp, aided by robust cost-control measures undertaken in H1 and rationalising employee pyramid, Motilal Oswal Financial Services (MOFSL) said in a result update.

The company saw a second consecutive quarter of net headcount reduction by more than 2,000, which, along with the optimisation of subcon expenses, contributed significantly to margin improvement. With a strong margin outperformance, HCL Tech remains confident of achieving its margin guidance of 18-19 per cent, the brokerage firm said.

Those at Kotak Institutional Equities, meanwhile, have raised Ebit margins estimates by 30-50 bps during FY24-26, driving

(-)0.8-1.5 per cent change in earnings estimates during the period.

"Our target price remains unchanged at Rs 1,410. Multiple years of investments in digital have allowed HCL Tech to have a balanced portfolio of business and drive consistent growth. Stock trades at reasonable 18.8X FY2025E earnings. Maintain BUY," it added.

That apart, higher exposure to Cloud, which comprises a larger share of non-discretionary spending, offers better resilience to its portfolio in the current context amid higher demand for Cloud, Network, Security, and Digital workplace services, analysts noted.  

Given its capabilities in the IMS and Digital space, along with strategic partnerships and investments in Cloud, they expect HCL Tech to emerge stronger on the back of healthy demand for these services in the medium term.

That said, while H2 is pegged to be superior than H1, discretionary spends cut-led challenges are likely to remain, cautioned ICICI Securities in a note.