Analyst Call Tracker: Why are analysts lowering expectations from HCL Technologies?

Many analysts expect HCL Tech to underperform even on the operational front.

Analysts are lowering expectations from HCL Technologies and preferring others like Infosys in the large-cap IT space, according to reports by broking houses ahead of the fourth-quarter earnings season.

Global research and broking firm JP Morgan recently put HCL Technologies on its “negative catalyst watch" citing high near-term risks as a major blow for the IT giant.

JP Morgan also expects HCL to negatively surprise analyst expectations, while also seeing downside risks to demand.

ICICI Securities too sees HCL reporting the weakest set of earnings among IT companies under its coverage.

The pessimism over HCL Tech emerges from a likely 1.9 percent sequential decline in constant currency revenue growth in Q4, largely on account of a weak seasonality in its product and platform business.

Devang Bhatt, lead analyst at IDBI Capital Markets, sees a 0.8 percent decline in HCL Tech's revenue for the fourth quarter due to weak seasonality in the product business. "HCL Technologies has a presence in the product business which will witness the adverse effects of a seasonally weak quarter. For IT services, its earnings are expected to be in line with the industry trend, however, weakness in the product business is likely to weigh on the overall revenue for the company," Bhatt said.

Despite blaming the seasonally weak quarter for HCL Tech’s likely subdued performance, Bhatt would still pick peers like Infosys as better investment ideas. He believes that investors should opt for seasoned stocks with a better portfolio mix, like Infosys, as they make safer bets during times of uncertainty.

Analysts at HDFC Securities expect HCL Tech to underperform even on the operational front. According to the analysts, softness in the BFSI segment (Europe Banking & Financial Services and US regional banks), to which HCL Tech has a fairly sizeable exposure, is likely to drag its numbers down.

Trends as per Moneycontrol's Analysts' Call Tracker also paint a similar picture as ‘buy’ calls for HCL Technologies declined to 26 from 30 over the quarter. The dip in ‘buy’ calls was also accompanied by an increase in two ‘hold’ and one ‘sell’ ratings for the stock. Out of the total 46 brokerages covering the stock, 20 broking firms either have a ‘hold’ or ‘sell’ rating for the IT major.

Although Apurva Prasad, Vice-President of Institutional Research at HDFC Securities, maintains a constructive stance on HCL Technologies, he too favours Infosys and LTIMindtree as his top picks within the large-cap IT space. Prasad cites HCL Tech's persistent underperformance in recent times as the reason for his lack of preference for the company over its peers.

Prasad also points out factors that favour Infosys over HCL Tech in the eyes of analysts. "For instance, Infosys has demonstrated itself as an industry leader in terms of organic growth. The company has managed to post better numbers than HCL Tech despite experiencing some moderation in its margins. In contrast, HCL Tech had adopted a different business strategy in recent years when it focused on acquisitions, which has led to some strain on its financials and negatively impacted its return ratios," he said.

In terms of Q4 earnings, Prasad anticipates HCL Tech's performance to be consistent with the industry trend. However, he also pointed out that due to weak seasonality in the January-March period and a robust sequential base in the previous quarter, HCL Tech may experience a decline in growth on a quarter-on-quarter basis.

Overall, it remains to be seen whether HCL Tech's fourth-quarter earnings will spoil the mood for analysts or not. However, one thing is clear, weak performance or not, HCL Tech still fails to make it to brokerages' top picks within the IT universe.