IT major HCL Tech is likely to report a sharp recovery in revenue growth and net profit growth even amid a slowdown in tech spending, when the company declares its fiscal second quarter results on October 12.
HCL Tech's profit after tax (PAT) for the July-September quarter is expected to increase by 6.14 percent quarter-on-quarter to Rs 3,750 crore, as per the average of estimates from five brokerages. Revenue is likely to grow 2.3 percent quarter-on-quarter to Rs 26,909 crore.
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The continued impact of cuts in discretionary tech spending is likely to continue to weigh on HCL Tech’s second quarter results. However, it would be offset by a decent software business growth year-on-year and a month's contribution from the ASAP Group acquisition.
HCL Tech’s business mix to help revenue, profit growth
"Revenue growth is expected to experience a sharp recovery after two consecutive quarters of decline. The growth will be supported by the recovery in ERD (Engineering and R&D) services, complemented by the supportive IMS (infrastructure management) service,” said Motilal Oswal in a pre-earning research note.
“HCL Tech is one of the key beneficiaries of the business mix and cloud adoption at scale, given its expertise in ERD and IMS," it added.
"We are factoring in robust revenue growth quarter-on-quarter from the ASAP acquisition, which will bolster ER&D services growth (ER&D currently accounts for 15.4% of revenue). ER&D may witness a pickup after a sharp decline of 5.2 percent in Q1,” said Elara Capital in a research note.
“Sequential growth may also be supported by a multi-year managed public cloud services deal with Siemens,” it added.
HCL Tech EBIT margins seen rising in Q2FY24
The mean of earnings before interest tax (EBIT) margin estimates for HCL Tech in July-September quarter stands at 21.4 percent, reflecting a 91 basis points sequential expansion attributed to operational efficiencies. (Note: One basis point is one-hundredth of a percent.) In the previous April-June quarter, HCL Tech reported EBIT at 20.5 percent.
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The quarter-on-quarter margin improvement would be due to wage hike deferral and a higher contribution from the high-margin Products & Platforms segment, said BNP Paribas.
HCL Tech recently announced that the wage hike cycle would be skipped for mid-level and senior employees, while for junior employees, it has been pushed back to the December quarter.
Furthermore, last month, the company unveiled a $2.1 billion deal with Verizon. This net new deal, spanning six years, is expected to start contributing from November 2023. “The Verizon deal worth USD 2.1 billion will come into effect from November,” said Elara Capital.
Key factors to watch from HCL Tech’s earnings
Key areas to watch include the performance of impacted verticals like ER&D, tech, and telecom; the FY24 revenue and margin outlook; the risk of macroeconomic headwinds on demand and demand outlook; the outlook on services and Products and platforms segments; investments in GenAI partnerships and solutions; and the timeline of large deal win ramp-ups and pipeline.
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