What do analysts expect from HCL Tech's Q1 results

Nachiket Kelkar
moneycontrol.com

After yet another quarter of disappointment by Infosys, all eyes will now be on HCL Technologies first quarter (July-September) results on Wednesday. The India's fourth largest software services exporter is expected to report  3-5% sequential growth in volumes, however margins will be under pressure due to wage hikes.

"Volumes are expected to be 3.1% and (there will be) cross currency benefit of 20 bps. Offshore hike of 8%, onsite hike of 2% and higher proportion of IMS (infrastructure management services) revenues to impact margins," says Yogesh Aggarwal of HSBC Securities and Capital Markets India.

Many analysts expect HCL Tech's margins to decline 200-250 bps due to the wage hike, and that will also drive profits down sequentially.

Bangalore-based Infosys last week reported a net profit of Rs 2,369 crore in July-September quarter, up 24% year-on-year (3.5% quarter-on-quarter), while quarterly revenue rose 21% from a year ago (2.5% sequentially), largely in-line with estimates.

However, it cut its EPS guidance for the full year and has also lowered its full-year rupee EPS guidance much more than what analysts had expected.

On the other hand, HCL Tech, which follows a July-June quarter, has performed ahead of street expectations in recent quarters, despite Europe, which has been hit by the Euro zone debt crisis, contributing 27% of revenue.  US accountis for 54% of its revenue.

Client mining, which in simple terms means getting more out of existing clients, is one key reason for its strong performance in recent quarters, say analysts.

There has also been a lot of vendor churn this year, as clients have looked to optimising costs amid a macro-economic slowdown, which has also benefited HCL Tech. Customer additions of USD 100 million plus, quintupled over the last two years, the company had said post its fourth quarter results.

Key things to watch

-- HCL Tech doesn't give specific guidance, so the street will be eager to hear any comments related to the overall demand environment and how it sees the road ahead.

-- The company has had strong deal wins in the last few quarters, and so new deal wins and pipeline will also be of street's interest.

-- Commentary on margins, overall pricing environment will also be eyed.

-- Growth in key verticals, like financial services, which accounted for 26% of revenues in Q4, will be key.

Stock Talk

HCL Tech has remained among the top picks for several analysts, following its strong earnings performance over the last few quarters. The stock has gained over 22% since June-end, much ahead of the wider NSE Nifty, which is up over 7%.

HCL Tech remains a top pick for Nomura Financial Advisory and Securities India and Citigroup. Motilal Oswal also has a "buy" on the stock. However, post the recent surge, valuations are now becoming expensive and there could be limited upside from current levels feel some analysts like HSBC's Aggarwal.

HSBC recently downgraded the stock to "neutral" from "overweight," with a target price of Rs 610.