Domestic IT services major HCL Technologies has reported its earnings for the March quarter (Q4 FY2023) with results largely in line with expectations. The company’s revenue fell 1.2% sequentially in constant currency, which was slightly better than the consensus estimate of a 1.5% decline. The company’s IT and Business Services segment, which contributes over 70% to total revenue, saw a sequential growth of 1.8% in constant currency. However, the software and engineering research and development (ER&D) business segment did not perform well as discretionary spending by customers delayed decisions.
Looking ahead, HCL has guided for 6-8% year-on-year revenue growth in constant currency for FY24, with strong deal acquisitions expected to drive revenue growth. During Q4, the company had signed ten large service deals and three software deals with total contract value for new deals at $2.07 billion.
Last quarter, earnings before interest and taxes (EBIT) margin at 18.2% slightly missed consensus expectations of 18.4%. For FY24, the company’s management has guided for EBIT margin to be in the range of 18-19% while maintaining its medium term margin target of 19-20%.
Nomura Financial Advisory & Securities (India) Pvt. Ltd. believes that HCL’s biggest lever for improving EBIT margin will be lower net hiring, especially for lateral or experienced candidates, as attrition continues to decline and demand slows.
But given the global macroeconomic uncertainties, HCL saw a decline in earnings at par with peers Tata Consultancy Services (TCS) and Infosys Limited, A group of brokerages have reduced their FY24 and FY25 Earnings Per Share (EPS) estimates for the stock.
Nevertheless, HCL appears to be in a better position than its peers.
According to analysts at ICICI Securities Ltd, HCL has limited exposure to troubled BFSI clients, and a strong 6.9% segment growth in constant currency on the back of recent large deal ramp-up in the BFSI vertical, led by both TCS and Infosys. This is in contrast to the weak growth in lately.
“Also, with Infosys having less exposure to HCLT for discretionary projects and more towards the business side, there is hardly any major project rampdown or cancellation. As a result of these two factors, we expect HCLT to grow faster than both Infosys and TCS in FY24, the brokerage house said in a report dated April 21.
In addition, HCL’s high exposure to cloud, which comprises a substantial portion of non-discretionary spends, provides better flexibility to its portfolio in the current context with high demand for cloud, network, security and digital workplace services, as That’s what the analysts have told. Motilal Oswal Financial Services Ltd.
Besides, the HCL stock is trading at ~15x FY25E EPS, offering a margin of safety, the Motilal Oswal report said.
Finally, while HCL is not immune to earnings declines, the company is seen as better positioned than its peers, owing to limited exposure to troubled customers, higher exposure to cloud and strategic deal wins.
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