HCL Tech Q2: Revenue guidance cut but deal wins at all-time high; should you buy, sell or hold?

With a strong margin outperformance, HCL Tech remains confident of achieving its margin guidance of 18-19 percent.

HCL Technologies reported a mixed Q2FY24 as the firm's revenue growth fell short of most analysts' estimates but EBIT margins were in line with expectations. The decline in revenue was a result of a more pronounced slowdown in demand, due to lower discretionary spending in the IT sector, and reprioritisation of spending to core operations, said analysts.

HCL Tech cut the FY24 revenue growth guidance in constant currency terms to 5-6 percent, maintaining the margin guidance of 18-19 percent, which came largely in line with brokerages’ expectations.

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The soft Q1 and Q2 means the required CQGR, even on this reduced guidance, is 2.6-3.8 percent, said Nuvama Institutional Equities, adding, “This is a tall ask, but which management is confident of achieving.”

HCL Tech to accelerate in H2 to catch up first two quarters’ slump

Amid an uncertain environment, the HCL Tech management expects a strong H2. The key focus of investors will be on the company’s ability to deliver a better H2 compared to its peers, who have a muted outlook.

Motilal Oswal expects that the strong revenue growth and continued cost-control measures in the fiscal second half will provide operating leverage to HCL Tech and support the overall margin improvement.

Considering the planned ramp-up in recent large deals, software business seasonality, ongoing business momentum, and contribution from ASAP, the management remains confident.

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The EBIT margin is expected to recover to 18.6 percent in FY25 as the company boasts of a strong deal book. As a result, HCL Tech might outperform its fellow IT services players.

Share price outlook

Even on reduced guidance, HCL Tech is likely to be the fastest-growing large-cap in IT Services, said Nuvama. Its decent growth in services and lower exposure to the troubled BFSI segment imply a high probability of stable earnings growth, the brokerage firm added. This will support the share price despite the near-term weakness. A high dividend yield and inexpensive valuation (18.5x FY25E PE) provide a floor to the stock price. Any near-term correction should make it more attractive to investors.

Motilal Oswal and Nuvama both maintained their 'Buy' calls on the IT player, with target prices of Rs 1,410 and Rs 1,400, respectively. Morgan Stanley has maintained its ‘Overweight’ call, while cutting the target price from Rs 1,450 per share to Rs 1,400. In comparison, Nomura has a 'Neutral' call on the company, issuing a target price of Rs 1,200 per share, since the global brokerage believes that the drop in discretionary demand is starting to hurt the company.

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