HCL Tech slips 2% on profit booking post September quarter results

Shares of HCL Technologies (HCL Tech) were down 2 per cent at Rs 1,225 on profit booking on the BSE on Monday in an otherwise strong market after the management reiterated its guidance of double-digit USD revenue growth and 19-21 per cent earnings before interest tax (EBIT) margin for FY22, although it lowered its Products and Platforms (P&P) growth to 0-1 per cent from low-single digits.

HCL Tech announced a payout policy, which fixes payouts at minimum 75 per cent of net Income cumulatively over the next five years i.e FY22- 26. In line with this policy, the company has declared a dividend of Rs 10 /- per share for July-September quarter Q2, up from Rs 7 per share in the prior periods.

With today’s decline, the stock has now corrected 11 per cent from its record high level of Rs 1,377 touched on September 24, 2021. In past three months, HCL Tech has outperformed the market by surging 23 per cent, as compared to 16 per cent rise in the S&P BSE Sensex. TCS and Infosys were up 14 per cent during the same period.

The Information technology (IT) services firm HCL Tech on Thursday reported 3.9 per cent profit in the second quarter (Q2) ended September. The IT firm's forecast for double-digit constant currency growth in the current financial year remains unchanged. HCL said its Q2 revenue was Rs 20,655 crore, up 2.9 per cent sequentially, and 11.1 per cent year-on-year. Net income for the quarter was Rs 3,265 crore, a rise of 1.6 per cent quarter-on-quarter, and 3.9 per cent annually.

The firm continues to expect 2021-22 (FY22) revenue to grow in double digits in constant currency, while earnings before interest and tax (EBIT) margin is expected to be between 19 and 21 per cent for FY22. EBIT margin in the September quarter fell 0.4 per cent to 19 per cent.

The brokerage firm Motilal Oswal Securities said “We are encouraged by the strong performance in the Services business, especially the ER&D vertical, where the demand environment remains favorable. With the management expressing confidence in continued growth momentum in the business in 2H, this should drive growth in FY22”.

Higher exposure to IMS (around 37 per cent of revenue), comprising a larger share of nondiscretionary spend, offers a better resilience to its portfolio in the current context, with increased 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. While the Products business will be soft in FY22E, we expect high single-digit growth for FY23E led by HCL Tech’s capabilities to rightly align and sell these products in the long run, the brokerage firm said with maintain ‘buy’ rating on the stock.

The P&P business has been under pressure for the last few quarters which forces the company to lower its growth guidance from lower single digit to flat growth in FY22. We believe there is no risk to their overall double digit revenue guidance for FY22 as well as EBIT margin guidance due to i) continued growth in IT services and ER&D ii) pricing discipline as the company mentioned they are pushing for price increase and some incremental deals are coming at higher pricing. The stock is at valuation discount to its large peers and we believe the valuation will soon catch up, ICICI Securities said in a note.