Shares of HCL Technologies climbed nearly 4% to hit a day's high of ₹1,619.60 on the NSE after the brokerages remained upbeat on the IT consulting company following its third quarter results wherein it reported strong all-round quarter with revenues and EBIT margin well ahead of estimates.
However, it seems that investors were not convinced about the numbers despite it seemingly appearing to be a pretty big beat. Global brokerage CLSA has downgraded the HCLTech stock to 'Underperform' from 'Outperform', despite raising the target to ₹1,536 per share. It said the average stock return over the past five years has been flat.
CLSA said that bunching up of multiple catalysts led to a strong beat but they see weak sequential growth in the next quarter and the quarter followed.
Ambit said that qualitatively the numbers are better than peers but valuations of HCLTech keep them at bay. Valuations are at 24.9 times forward multiple, and 84% premium to pre-Covid three-year average.
Though Ambit has a 'Sell' call on HCLTech with a target price of ₹1,360, the brokerage prefers the company over Infosys and TCS. HCLTech will likely outperform peers on cloud demand and ER&D recovery, but absolute growth largely at pre-Covid levels, it said.
Analysts at Morgan Stanley maintains an 'Equal weight' rating on the stock but raised their target price to ₹1,600 per share from ₹1,470, highlighting the company's superior third quarter performance and notable beats in services business and EBIT margins.
HCLTech reported better-than-expected earnings for the quarter ended December, on the back of strong growth in the services and software business. Its consolidated net profit rose 13.5% sequentially to ₹4,350 crore in the December quarter, and revenue grew nearly 7% to ₹28,446 crore.
In constant currency terms, HCLTech’s revenue grew 6% sequentially in the quarter.
Narrowed FY24 revenue guidance
Despite good numbers in the third quarter, HCLTech has trimmed its guidance for the current financial year.
The company's management has narrowed the FY24 revenue guidance to 5%–5.5% year-on-year in constant currency from 5%-6% and maintained the margin guidance of 18%–19%. The management expects a solid fourth quarter and continued momentum in FY25.
HCLTech's performance in the third quarter was decent and guidance largely intact, which should make it the fastest-growing largecap in FY24, according to Nuvama Institutional Equities. Its decent growth in services and lower exposure to the troubled BFSI (23%) segment imply high probability of stable earnings growth, it said.
"A high dividend yield and inexpensive valuation provide a floor to the stock price. We see Q3FY24 to be the bottom for the earnings downgrade cycle for HCL and the sector," the brokerage said while maintaining a 'Buy' on the stock and a target of ₹1,780 from ₹1,700 earlier.
Misses the mark in deal signings
Net new deal total contract value (TCV) of $1.9 billion declined 18% on-year and was soft. Barring $2.3 billion of Verizon deal, TCV in 9MFY24 has been muted. The management indicated a healthy pipeline and will be a key monitorable.
Domestic broking firm Kotak broadly maintains its FY2024-26 earnings per share (EPS) estimates on the back of an increase in margin assumptions. "We cut FY2025 revenue assumptions due to sluggish industry-wide discretionary spending," it said while raising its target to ₹1,650 from ₹1,600 per share earlier. The brokerage has an 'Add' rating on the counter.
"We are impressed with HCLTech's execution. Multiple years of investments in digital have allowed HCLT to have a balanced portfolio of business and drive consistent growth," Kotak noted.
After a strong 44% increase in stock price in the past 12 months, returns will be moderate hereon, according to Kotak.
First Published: Jan 15, 2024 10:12 AM IST
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