HCL Tech Q1 Review - Tepid Results With Miss On All Fronts; Guidance Retained: Axis Securities

Axis Securities Report

Financial Performance

In Q1 FY24, HCL Technologies Ltd. reported revenue of Rs 26,296 crore, down 1.2% QoQ and below our expectations. The company’s operating profit stood at Rs 4,460 crore, reporting a de-growth of 7.8% on a QoQ basis.

Missing our expectations, HCL Tech’s operating margins, too, declined by 110 basis points to 17%, which was largely led by higher operating expenses and higher onsite expenses during the quarter. Its net profit for Q1 FY24 stood at Rs 3,534 crore, registering a de-growth of 11.3% QoQ.

Outlook

We believe HCL Tech is well-placed for encouraging growth from a long-term perspective given its multiple long-term contracts with the world’s leading brands.

Richer revenue visibility gives us confidence in its business growth moving forward. However, rising concerns over business uncertainties in large economies and continuing supply side constraints are creating challenges for the company’s growth prospects moving ahead.

Valuation and Recommendation

We recommend a 'Hold' rating on the stock and assign a 17 times price/earnings multiple to its FY25E earnings of Rs 71.9/share to arrive at a target price of Rs 1,200/share, implying an upside of 8% from the current market price.

Recommendation Rationale

The near-term outlook for IT services still remains sceptical due to delayed decision making and prevailing uncertainties in North America. On the positive side, the long term demand scenario continues to remain strong and the IT sector is likely to regain its momentum in H2 FY24 and onwards.

HCL Tech's management is also confident of gaining medium-term demand momentum, supported by the deals it has won in the previous quarters. It also foresees improvement on the company’s margin front going forward.

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