HCL Tech shares plunge post Q3 results. What should investors do?

Market


IT services company HCL Tech Ltd reported a higher-than-expected profit for the December quarter helped by strong deal wins, but lowered its full-year revenue view citing seasonal challenges in the fourth quarter. HCL Tech forecast full-year revenue growth between 13.5%–14.0%, compared with an earlier view of 13.5%–14.5%. HCL Tech shares plunged nearly 2% to 1,052 apiece on the BSE in Friday’s opening deals.

“HCL Tech’s 3Q results were ahead of estimates led by higher-than-expected revenue growth in software business. Services segment witnessed growth moderation due to impact of furloughs. Deal bookings remained steady, however net hiring moderated and implied guidance for 4Q is soft. While we raise our estimates by 2-3% to factor the beat, we see limited upside amidst rising demand uncertainty. Maintain Hold with revised target price of 1050,” said global brokerage Jefferies.

The IT company has for the first time crossed 5,000 crore of net income before interest and taxes and 4,000 crore of profit after tax (PAT) during a quarter. 

“Management expects revenue growth in Q4 to be weak QoQ due to seasonality in the software business. However, management remains confident about the medium-term growth outlook due to market share gain, strong deal intake, and deal pipeline. We raise our earnings estimates by 1.4-1.8% for FY23E-25E, factoring in Q3 performance. We maintain BUY with a TP of Rs1,125/share (earlier 1,100),” said analysts at Emkay.

It narrowed current fiscal growth guidance in the range of 13.5-14 per cent for the overall revenue in constant currency terms and margin to 18-18.5 per cent. The company had increased guidance in the last quarter from 12 to 14 per cent to 13.5-14.5 per cent.

While brokerage Edelweiss sees strong sustainable demand (transformational/cost-takeout deals) driving growth for the sector – HCL Tech is likely to underperform peers, primarily due to its unfavourable business mix (33% rev from P&P and ERD). 

“Inexpensive valuations and high dividend yield limit the downside potential. ‘HOLD/SU’ with TP of INR1,220. We note, despite this quarter’s decent performance, management has trimmed its FY23 guidance,” the note added.

The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.


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