HCL Tech Q4 Preview | Flat revenue, margin contraction expected as P&P declines

The aftermath of the US banking crisis is being felt by Indian IT services firms, which have a sizable exposure to the (BFSI) segment.

Indian multinational IT services company HCL Technologies (HCL Tech) is scheduled to announce its January-March earnings on April 20, with analysts expecting consolidated revenue to remain flat, and net profit to decline by 4.8 percent on a sequential basis.

According to a poll of brokerages, HCL Tech may report consolidated revenue of Rs 26,801 crore, up 18.6 percent year-on-year (YoY), while consolidated profit after tax (PAT) is projected to rise by 8.5 percent YoY to Rs 3,898 crore. On constant currency (CC) basis, the company is expected to report a quarter-on-quarter (QoQ) decline in the range of 1-2 percent.

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The aftermath of the US banking crisis is being felt by Indian IT services firms, which have a sizable exposure to the banking, financial services and insurance (BFSI) segment and derive a major part of their revenues from this sector, particularly from the US and European markets. Kotak Institutional Equities has pegged HCL Tech’s exposure to the banking and financial services sector, excluding insurance, at 14 percent.

Recently, TCS reported a CC revenue growth of 0.6 percent QoQ, the lowest in 11 quarters, while Infosys’ revenue declined 3.2 percent QoQ.

“For Q4FY23E, we expect HCL results to be the weakest in our coverage universe in terms of CC QoQ growth at just -1.9 percent due to weak seasonality in the products & platforms (P&P) business,” said analysts at ICICI Securities.

According to brokerage firm Motilal Oswal, HCL Tech’s software business is expected to witness a decline of 22 percent QoQ, while the service segment is projected to grow by 3.6 percent QoQ.

“We expect services / engineering, research and development (ER&D) / P&P growth of 3 percent / 3.5 percent / -21 percent QoQ in USD terms. We expect P&P revenues to decline by 4 percent YoY due to termination of HCL Tech’s DXC partnership in FY22,” according to JM Financial.

Earnings before interest and taxes (EBIT) is expected to reach Rs 4,962 crore, up 22 percent YoY, according to the brokerage poll. EBIT margin may expand to 0.5 percent on a yearly basis, but might contract by 1.1 percent QoQ.

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“We expect EBIT margin to decline by 130 basis points (bps) QoQ due to decline in higher margin product revenue even while services will show an improvement in margins driven by improvement in utilisation,” says Asian Market Securities. It also expects HCL Tech to guide for 5-7 percent revenue growth in CC for FY24E and a margin guidance of 18-20 percent.

Investors will be watching out for HCL’s commentary on tech spending outlook, specifically in the BFSI segment, macro demand environment, deal pipeline, and large deal activity, as well as its outlook on product and ER&D businesses, given the turmoil in Europe. Margin outlook and attrition trends are the other aspects to watch out for.

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