IT major HCL Technologies is expected to report a soft set of numbers for the April-June quarter of the current financial year (Q1FY24), mostly because of the slowdown in the demand environment and the impact of cancellations in ER&D (engineering research and development).
The company’s revenue may see a rise on a yearly basis but it may remain either flat or negative sequentially but margins may remain stable.
Apart from the numbers, brokerage firms said that management commentary on the near-term demand environment and ER&D will be the key monitorable.
As per the estimates of Kotak Institutional Equities, HCL Tech’s adjusted PAT may rise 18.2 per cent YoY and revenue may see a rise of 14.9 per cent YoY.
“Our forecast of one per cent organic constant currency (CC) revenue growth rate is based on—(1) 3 per cent QoQ (quarter-on-quarter) growth in IT services courtesy of ramp-up in mega-deals, (2) 2.5 per cent QoQ revenue decline in engineering research and development and (3) 4.1 QoQ decline in the products segment,” said Kotak.
The brokerage firm pointed out that the engineering research and development segment will have to bear the full quarter impact of programs that came to an end or were cancelled.
Discretionary spending in IT has slowed, although offset by mega-deal ramp-up. EBIT margin will remain stable QoQ. Pressure from large deal ramp-up will be offset by operational improvements, Kotak said.
The brokerage firm expects HCL Tech to retain 6-8 per cent revenue growth guidance and 18-19 per cent EBIT margin guidance for FY2024.
Kotak Institutional Equities expects investors to focus on the following five things:
(1) the state of engineering research and development segment demand and the reason for the seeming disconnect in the growth of HCL Tech versus peers,
(2) growth in apps in light of deteriorating discretionary spending; note HCL Tech’s apps business is discretionary heavy,
(3) demand for IMS (infrastructure management services), which seems to have picked up,
(4) TCV (total contract value) and ACV (annual contract value) of deal wins, and
(5) factors that underpin management confidence to achieve guidance.
Brokerage firm BSE-S0003637″ data-name=”Motilal Oswal Financial Services”>Motilal Oswal Financial Services expects HCL Tech’s revenue growth to remain muted due to the impact of productivity gains, a slowdown in small deals, and the impact of cancellations in ER&D. However, Motilal believes HCL Tech should see a 20 bps margin improvement despite slower revenue growth.
The estimates of the brokerage firm show HCL Tech’s revenue in rupee terms may rise 13.7 per cent year-on-year (YoY) while adjusted PAT can rise 19.6 per cent YoY.
Brokerage firm Nirmal Bang Equities expects HCL Tech to report a flat constant currency (CC) growth on a QoQ basis after a 1.2 per cent CC decline in Q4FY23 due to the seasonal dip in the P&P (Products & Platforms- comprises the HCLTech Software Division) business. “It is likely to face cross-currency tailwinds of about 50 bps on a QoQ basis,” Nirmal Bang said.
“We expect EBIT margin to contract by 60 bps QoQ. We expect negative operating leverage and the possible pricing pressure that HCL Tech has been alluding to in recent days to be headwinds. There is a fair probability that the 6-8 per cent growth guidance given may be revised down either post-Q1FY24 or post-H1FY24 largely driven by lower demand from BFS and also from likely pricing pressure,” Nirmal Bang said.
As per the brokerage firm, key things to watch out for in HCL Tech’s Q1 earnings include: (1) whether it can continue to deliver the strong TCV numbers of the last many quarters on the services side, (2) the outlook for the ERS and the IMS service lines for FY24, and (3) timing and quantum of salary increases for FY24.
Shares of HCL Technologies have gained about 19 per cent against a just 5 per cent gain in the BSE IT index and a 21 per cent gain in the benchmark Sensex in the last one year.
Around 10 am, shares of HCL Tech were trading 0.28 per cent lower at ₹1,120.95 on BSE.
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Disclaimer: The views and recommendations given in this article are those of the brokerage firms. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.
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Updated: 11 Jul 2023, 10:06 AM IST
