HCL Tech shares plunge on Q1 miss. Buy, sell or hold?
Premium- Indian IT company HCL Tech's Q1 net profit rose 2% while revenue increased by 17%
Shares of HCL Technologies plunged about 2% to ₹909 apiece on the BSE in Wednesday's opening deals after the IT services company reported an over 2% year-on-year (YoY) rise in its consolidated net profit for the three months ended June 2022 at ₹3,283 crore. However, the company’s net profit was down 8.6% quarter-to-quarter (QoQ).
The revenue of the Noida-headquartered firm stood at ₹23,464 crore, nearly 17% higher than the year-ago period. Meanwhile, the company’s dollar revenue for the June quarter grew 15.6% annually in constant currency to $3.02 billion, boosted by new deal wins and acceleration in clients’ digital agenda.
“HCL Tech's 1Q revenues were in line but the 100 bps QoQ fall in margins disappointed. PAT was also in line due to forex gains and higher other income. While HCLT has maintained its FY23 growth guidance of 12-14%, slower net hiring and higher subcontracting is a concern. We also see risks to its FY23 margin guidance of 18-20% and lower our forecasts by 1-4%. We expect further cuts to consensus EPS before the stock turns," said Jefferies in a note while maintained Hold rating on HCL Tech shares with revised target price of ₹980.
HCL Technologies Ltd has maintained its 12-14% revenue growth guidance in constant currency for FY23 on the back of strong demand for digital transformation in key markets. The company also left its earnings before interest and taxes (EBIT) margin guidance unchanged at 18-20%.
'Pressure on Services business margins remains a concern, and execution on margin recovery will be key for the stock’s performance," said brokerage Emkay. It has maintained its Buy tag on the IT stock with a target price of ₹1,100.
“Management expects margins to recover in coming quarters despite staggered salary hikes, which would help HCL Tech deliver EBIT Margin closer to the lower end of its guided range of 18-20% in FY23. Optimization in subcontracting costs, better pricing, flattening employee pyramid, offshoring, automation, and improvement in utilization remain key levers to drive margin improvement," Emkay added.
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