The results season picks up steam with some big-ticket results lined up over the course of this week starting with HCL Technologies Ltd (HCL), which is scheduled to declare its results on July 12 for the quarter ended June 2022.
Ranked among the top four IT companies in the country, experts expect HCL Tech to report a soft revenue growth during the quarter because of seasonal weakness and moderation in demand. The prevailing cross-currency headwinds are also likely to play spoilsport in the dollar revenue growth for the company.
According to a pool of brokerage reports that Moneycontrol has access to, the Noida-based IT product and services company is expected to report a profit after tax (PAT) of Rs 3,200–3,400 crore for the reported quarter, registering a flat to mid-single digit on-year growth. Sequentially, however, the profits are expected to take a dip of about 6–10 percent.
Revenues for the quarter are likely to come in at Rs 23,400 crore at an on-year growth of 16 percent, while the sequential growth in revenue is likely to be a modest 3 percent.
The company had recorded a consolidated net profit of Rs 3,215 crore during the corresponding period of last financial year when had it registered consolidated revenues of Rs 20,068 crore.
The PAT during the January to March 2021 period stood at Rs 3,593 crore on a consolidated revenue of Rs 22,597 crore.
Constant currency and dollar revenues
Experts expect a modest sequential growth of 1-2 percent in the dollar revenues of the company while the revenue in constant currency terms is likely to grow at 2.5 percent compared to the previous quarter.
“Q1FY23 CC (constant currency) growth will be good due to deal conversion in IT services and P&P (products and platforms) business seasonality while core Services business will see some growth moderation, but should deliver 2.5 percent QoQ CC growth,” a report from the brokerage firm Motilal Oswal Financial Services said.
Kotak securities forecasts a modest sequential revenue growth of 2.3 percent led by 2.4 percent CC growth in services (IT services + Engineering and Research & Development or ERD). Kotak expects that the services growth will be powered by continued strength in deal wins while products business will likely stay flattish at $306 million of revenues.
Margins
Brokerages unanimously expect the company to take a hit on margins due to higher retention costs, increase in travel and visa costs as well as higher costs of sub-contractors. The EBIT (earnings before interest and tax) margins are expected to decline by 40-50 bps on quarter. However, when compared to the year ago period, the decline is much more pronounced at close to 200 bps. The EBIT margin for the company during the current quarter are likely at 17.5 percent.
Deal TCVs and guidance
The company is likely to continue witness strong traction in the new deal TCVs (total contract value) during the quarter. “We forecast growth in TCV of net new deals to be above $2 billion from $1.7 billion in June 2021 quarter”, a report from Kotak Institutional Equities said.
The analysts expect the company to retain 12-14 percent revenue growth guidance and 18-20 percent EBIT margin band. However, the focus will be on the EBIT margin guidance noting the cut from 19-21 percent guidance given in FY2022 based on which there is a likelihood that the company may revise its margin guidance downwards in the coming quarters.
Key focus areas
Experts believe that the products and platforms business will be an area of focus noting disappointments over the past few quarters.
Kotak institutional Equities expect investor focus on claw back of margins noting continued slippages over the past few quarters and large deal activity in the market, especially noting company's higher dependence on large deals for growth.
Pricing leverage, if any, cancellation/deferment of programs due to macro uncertainties, high inflation and supply chain disruptions. Demand outlook for major verticals like BFSI, Manufacturing, and Healthcare will be the other key area to watch out for along with the attrition rates.
HCL Technologies was trading at Rs 952.2 on July 11 at 1.30 pm, down Rs 31.8 or 3.2 percent from its previous close. The stock is down 3 percent over the last one year and has lost 6 percent over the past one month.
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