HCL Tech Q4 Review: Strong Services Growth But Margin Woes Stay, Say Analysts

HCL Technologies Ltd.'s growth in the services segment offset the weakness in products and platforms business in the fourth quarter, and its FY23 guidance is reasonable, according to analysts. That helped the shares to gain the most in more than a month at opening trade.

The Shiv Nadar-founded IT saw its IT and business services revenue rise 5.2% sequentially to $2,199 million in the three months to March. Its products and platforms revenue fell 24% to $304 million.

Overall, the the Noida-based software services provider's revenue rose 1.19% over the previous three months to Rs 22,597 crore, in line with the Bloomberg consensus estimate.

Key Highlights: Q4 FY22 (QoQ)

• Net profit rose 4.39% to Rs 3,593 crore, against the Rs 3,354.3-crore forecast.

• EBIT fell 4.42% to Rs 4,069 crore.

• EBIT margin contracted to 18% from 19.1%.

• Declared an interim dividend of Rs 18 apiece.

"Our overall growth on YoY basis stands at 12.7%, better than the guidance led by strong momentum in digital, cloud and engineering services," said C Vijayakumar, chief executive officer and managing director.

The IT company added 39,900 new employees during the year, taking its total headcount to 208,877. "We continue to invest proactively to create a larger talent pool to address the demand," Vijayakumar said.

The company's attrition rate fell to 9.9% from 19.8% as of March, unlike peers Infosys Ltd. and Tata Consultancy Services Ltd.

Shares of HCL Technologies gained as much as 3.2% on Friday—the most since March 3—before closing 0.26% higher.

Of the 50 analysts tracking the stock, 38 recommend a ‘buy’, 11 suggest a ‘hold’ and one has a ‘sell’ call, according to Bloomberg data. The average of the 12-month price targets implies a 21.8% upside.

Here's what brokerages made of HCL Technologies' Q4 results:

• Maintains 'equalweight' at a target price of Rs 1,300, implying a potential upside of 18.2%.

• Better-than-expected Q4 results, FY23 revenue growth guidance in line.

• The positive surprise was driven by services business (+5% QoQ), while products and platforms were largely in line.

• Risks to upside: Sharp rupee depreciation, better-than-expected macro environment and acceleration in deal win momentum, better-than-expected margins.

• Risks to downside: Escalations in geopolitical environment and inflation risks hampering global macro environment, outcome on revenue guidance is lower than expected, weak commentary on deal wins in the coming quarters.

• Maintains 'buy', cuts target price to Rs 1,370 from Rs 1,410, still implying a potential upside of 24.7%.

• FY23 revenue guidance reasonable but margin disappoints. Strong growth in services offset by weakness in products and platforms.

• Growth visibility on services business (with lower margin) is higher than products business (with higher margin) and hence, expect EBIT margin to drop.

• Deal wins comprised a significant number of smaller-sized deals. The pipeline remains healthy.

• Key risks: weaker revenue and margin.

• Infosys is our top pick in large caps.

• Maintains 'accumulate’ with a target price of Rs 1,247, implying a potential upside of 13%.

• While Nirmal Bang has underweighted the IT sector, HCL Tech is a preferred pick due to significant narrowing of growth differential in FY23 — despite disappointment on revenue guidance — vis-à-vis Indian tier-1 growth leader Infosys.

• Sees modest acceleration in FY23 while most Tier-1 peers will see deceleration. Underlying growth in products and platforms business is positive and decline in FY22 is only optical as business model shifts to subscription and some products are discontinued.

• It is a cheap long-term call option on the product opportunity. It is better placed in the new demand environment due to its enormous automation related skills and IP.

• HCL, too, will see negative impact of the stagflationary environment developing in the western world, which may impact tech spending.

• Downgrades stock from ‘buy’ to ‘hold’ with a target price of Rs 1,064, implying a potential downside of 3%.

• Expects majority of revenue to be driven by IT services revenues and product revenues to be subdued. Hence, the company is set to register revenue growth at the lower end of guidance.

• This, coupled with macro headwinds prompts IDBI Capital to revise its rating and multiple downwards.

• Expects the company to face headwinds to margins mainly led by salary hikes, higher discretionary cost, impact of lower product revenues and investments, hence near term margins to remain under pressure.

• Maintains ‘buy’ at a target price of Rs 1,310, implying a potential upside of 19%.

• Higher exposure to cloud, which comprises a larger share of non-discretionary spend, offers a better resilience to its portfolio in the current context, with higher demand for cloud, network, security, and digital workplace services.

• Strong sequential growth within services, robust headcount addition, healthy deal wins, and a solid pipeline indicates an improved outlook.

• Given its deep capabilities in the IMS space and strategic partnerships, investments in cloud, and digital capabilities, we expect HCL to emerge stronger on the back of an expected increase in enterprise demand for these services.

• The stock is trading 18 times FY24 earnings-per-share estimates, which offers a margin of safety.

• Maintains ‘buy’ at a target price of Rs 1,290, implying a potential upside of 9.3%.

• Key positives include momentum in IT, rise in FY22 deal annual contract value, products and placements recovery in the medium term and payoff from accelerated investments in geo expansion.

• Maintains ‘accumulate’ with a target price of Rs 1,210 implying a potential upside of 11%.

• Given weak Q4 performance, soft guidance, TCV growth and visible margin headwinds from macros, we cut our EPS estimates.

• Leading indicators have turned a bit soft for HCL as net new deals witnessed growth of just 14% YoY which is not in-line with commentary related to current demand environment.

• Product and platforms commentary implies that the business needs more investments to perform better on a consistent basis. The medium-term focus seems to largely be on reducing the volatility.

• Guidance has been a bit lacklustre at 12-14% compared to the commentary and performance of service business after factoring softness in P&P business.

• Maintains ‘buy’, raises fair value to Rs 1,380 from Rs 1,420 earlier, implying a potential upside of 25%.

• Revenue guidance is significantly better even while its margin guidance band revision is on expected lines.

• We train our sights beyond sequential optics on the improvement in digital competencies and IT services business composition. A good time to buy.

• The products business was a strategic mistake, even though it will meet management’s internal rate of return targets. The acquisition approach should be based on potential of multiplier impact rather than simple yield play.

• Maintains ‘buy’, cuts target price to Rs 1,360 from Rs 1,440, implying a potential upside of Rs 23.7%.

• While HCL's Q4 revenues beat estimates, the 110 bps QoQ fall in margins disappointed. FY23 growth guidance of 12-14% was the key positive from Q4 and implies a strong 14-16% growth in its services business.

• Margin guidance of 18-20% for FY23 and higher tax rate drives 6-7% cuts to EPS estimates.

• Lowers price target to Rs 1,360 based on 23 time price-to-earnings ratio on the back of earnings cuts but maintains buy on strong growth outlook at reasonable valuations.