HCL Tech Shares Fall Despite Brokerages Optimism On Q4 Deal Wins

Analysts cheered HCL Technologies Ltd.’s strong deal wins and build-up of its digital capabilities even as the software services exporter missed estimates in the quarter ended March.

The company’s net profit slumped 72.1% sequentially to Rs 1,111 crore in the fourth quarter. A surge in tax expenses to Rs 2,256 crore from Rs 502 crore in the three months ended December dragged the bottom line. Its revenue rose 1.75% quarter-on-quarter to Rs 19,641 crore.

HCL Technologies expects revenue in FY22 to grow in double digits in constant currency terms. It expects EBIT margin for FY22 to range between 19% and 21%. The company said it registered its “highest-ever new deal booking” in the reported quarter at $3.1 billion, with an all-time high exit pipeline as well.

Still, some analysts saw this revenue growth guidance as conservative, indicating that uncertainty still persists in outlook. Of the 46 analysts, 41 have a ‘buy’ rating, three suggest a ‘hold’ and two recommend a ‘sell’, according to Bloomberg data. The average of 12-month consensus target prices implies an upside of 21.4%.

Shares of HCL Technologies fell as much as 3.3% to Rs 924 compared with a 1.51% gain in the Nifty 50.

Here’s what analysts had to say about HCL Technologies’ Q4 results:

Jefferies

• Maintains ‘buy’ rating but cuts target price to Rs 1,150 from Rs 1,200 apiece.

• Higher other income offset EBIT miss, higher tax rate in Q4 drove profit miss.

• Lowers earnings estimates by 5% to factor lower margin due to investments and increase in tax rate.

• Given strong total contract value, HCL Tech’s FY22 double-digit revenue growth guidance seemed a bit conservative.

• Growth in IT and business services segment and strong order book of $3.1 billion in Q4 were key positives.

Macquarie

• Maintains ‘outperform’ rating with a target price of Rs 1,250 apiece.

• Deal closures in FY21 and pipeline gives growth visibility in FY22.

• Products and platforms business hit by seasonal weakness.

• Margin-accelerating the pedal on investments for medium-term gains.

• Increased quarterly dividend payout from Rs 4 per share to Rs 6 a share.

Nirmal Bang

• Maintains ‘buy’ rating with a target price of Rs 1,150 apiece.

• Revenue growth a tad below estimate and in line EBIT margin.

• PAT level was a big miss due to one-off tax rate changes.

• Ability to support margins due to use of gig workers, significantly higher internal fulfilment due to up-skilling of employees is a positive.

• HCL Tech will be an outsized beneficiary of the digital infrastructure build out, which has been catalyzed by the pandemic.

Goldman Sachs

• Maintains ‘neutral‘ rating with a target price of Rs 975 apiece.

• Cuts FY22-23 EPS estimates by up to 5% to account for slightly lower revenue growth assumptions.

• HCL Tech’s investments in opening up new geographies and building digital capabilities are the right set of investments but potentially lagging their larger peers Infosys Ltd. and Tata Consultancy Services Ltd.

• Sees potential downside risk to street EPS estimates with lower organic growth potential for products and platforms business and gradual revival in engineering business.

UBS

• Maintains ‘sell’ rating with a target price of Rs 855 apiece.

• Lack of a specific guidance range for revenue, wider-than-usual profit guidance suggests uncertainty persists in outlook.

• Expects cuts to consensus forecasts, which should spur a negative reaction from investors.

• Bulls could take comfort from the contract win disclosures.

IDBI Capital

• Downgrades to ‘accumulate’ and cuts target price to Rs 1,090 from Rs 1,190 apiece.

• “EBIT margin of 16.6% was a big miss to our forecast of 19.2%.”

• Low single-digit growth for products and platforms (15.2% of revenue) is a miss.

• EBIT margin guidance is conservative.