IT major HCL Technologies beat Street expectations to report a 7.1 percent YoY rise in its net profit for the September FY22 quarter (Q2FY22) at ₹3,489 crore. On a sequential basis, its profit rose 6.3 percent. Meanwhile, the firm's revenue jumped 19.5 percent YoY to ₹24,686 crore. On a sequential basis, this rise was 5.2 percent.
Both the revenue and profit were above analysts’ estimates. Further, the board of directors also approved a dividend of ₹10 per share.
In constant currency terms, HCL Technologies’ revenue in the second quarter rose 16 percent YoY and 3.8 percent QoQ.
Unexpectedly, the company also raised its revenue growth guidance for FY23. HCL Tech now sees 13.5-14.5 percent growth in revenue in constant currency, against 12-14 percent projected earlier.
However, the company cut the upper end of its EBIT margin guidance for FY23. It now sees margins in the 18-19 percent range against 18-20 percent earlier.
Stock Price Trend
Post the strong September quarter results, the stock surged nearly 4 percent in an otherwise weak market. It rose as much as 3.7 percent to hit its intra-day high of ₹987.75.
However, it has not been a good year for IT stocks. HCL Tech has lost nearly 25 percent in the last 1 year as well as in 2022 YTD. While it has gained around 5 percent in October so far, the stock has been giving negative returns consecutively since April to September 2022, down 20 percent in this period.
Brokerage Views
Emkay: BUY
The brokerage retained a buy call on the IT major post its Q2 results and increased its target price to ₹1,070, implying a potential upside of 12.4 percent.
As per Emkay, HCL Tech delivered a better-than-expected operating performance in Q2. The demand environment continues to be healthy and fairly broad-based and the management remains confident about the near-to-medium term growth outlook on the back of strong deal intake and deal pipeline, it noted.
It further pointed out that HCL Tech has increased its revenue growth guidance to 13.5-14.5 percent CC for FY23, on the back of continued traction in the services business, product business seasonality, healthy deal intake and strong momentum in Cloud, Digital & Engineering services. Emkay added that the management has revised EBIT Margin guidance to 18-19 percent for FY23 (earlier, 18-20 percent), and the strong recovery in Q2 grants it confidence on delivering within the guided range.
Emkay raised its earnings by 0.9 percent to 2.5 percent for FY23E-25E, factoring in the Q2 performance. It maintained a BUY, with a TP of ₹1,070/share at 17x Sep-24E EPS (earlier, ₹1,060), considering reasonable valuations and the over 4 percent dividend yield.
Motilal Oswal: BUY
The brokerage reiterated a 'buy' call on the stock with a target of ₹1,240, indicating an upside of 32 percent. Strong sequential growth within Services, robust headcount addition, healthy deal wins, and a solid pipeline indicate an improved outlook, it said.
"Despite the tough demand environment, HCL Tech maintained its momentum by beating our expectations in both IT services and ER&D verticals. Moreover, the continued strong deal TCV, pipeline commentary and revenue growth guidance of 16-17 percent YoY in CC terms for the vertical should reassure investor concerns on the company’s growth," MOSL opined.
It further said that this strong growth guidance and margin performance (despite wage hikes) in an environment, where the demand for IT services is expected to be incrementally weaker, should help improve investor confidence on its business and lower the valuation gap with larger Tier 1 IT services peers. It continues to see HCLT’s defensive business as a positive in a demand-constrained environment.
On a combined basis, HCL Tech is expected to deliver a USD revenue growth of 10 percent and a corresponding PAT CAGR of 11.3 percent over FY22-24, predicted the brokerage. MOSL also increased its estimates for FY23 and FY24 by 4-6 percent.
CONTRARIAN VIEW
Nirmal Bang: SELL
In a contrarian view, brokerage house Nirmal Bang retained a 'sell ' call on the stock despite the strong results and has a target price of ₹842, indicating a downside of 12 percent.
"While FY23 is in the bag, we remain skeptical whether growth would be anywhere close to this pace in FY24. In the area of cost optimisation, HCL Tech is up against the entire Tier-1 peers & MNC players and as macro deteriorates, we see clients wanting to squeeze pricing on this part of their spend. The commentary on Europe and Manufacturing seems opposite to what we heard from TCS. We believe that HCLT will also feel the negative impact of the stagflationary environment developing in the western world, which will likely affect tech spending in FY24," noted the brokerage.
Post Q2FY23, Nirmal Bang's estimates broadly remain unchanged and it maintained its ‘Sell’ rating with a target price (TP) of ₹842 (13.9x Sept’24E EPS, multiple maintained; 30 percent discount to target PE of TCS).
It further stated that while in the very near term, the stock may react positively to the results and the relatively bullish commentary on H2FY23, the brokerage believes these numbers were broadly expected and that focus should be on FY24 and beyond. Lack of medium-term clarity may keep valuations subdued, it added.
