HCL Tech's Q1FY22 numbers may be relatively softer; deal wins, growth outlook to be in focus

The June quarter scorecard of HCL Technologies may come on a relatively softer side as the challenges for the company increased and product revenues declined due to the second wave of COVID-19 in the seasonally weak quarter.

The IT firm will release its June quarter scorecard on July 19. Along with the numbers, deal wins, growth outlook and revision in capital allocation to different verticals will be the key monitorables for investors.

Brokerage firm Motilal Oswal Financial Services expects a 14.3 percent year-on-year (YoY) rise in HCL Tech's June-quarter revenue while adjusted PAT may rise 15.1 percent YoY.

Motilal Oswal expects a relatively softer quarter for HCL Tech due to underperformance in the product business. The latter is expected to grow at low single-digits in FY22, the brokerage firm said.

Kotak Institutional Equities expects a weak quarter for HCL Tech and forecast constant currency (CC) revenue growth of 0.8 percent on a sequential basis.

"We attribute the weak quarter to three factors – (1) demand fulfillment challenges due to the second wave of COVID. High presence in impacted region of NCR has made HCL Tech more vulnerable than peers, (2) June quarter is seasonally weak and (3) decline in product revenues," Kotak said.

"We forecast sequential revenue growth of 1.6 percent in IT services, 3.5 percent in ERD and decline of 3.5 percent in products," said the brokerage.

COVID-related challenges and decline in product revenues will filter through to EBIT, which Kotak expects to decline by 40 bps QoQ. Investments in the geographical expansion will also impact margins, said Kotak.

As per Kotak's estimates, HCL Tech's June quarter revenue may rise 12.8 percent while adjusted PAY may grow 9.1 percent YoY.

Kotak expects the company to retain FY2022 guidance of double-digit revenue growth and 19-21 percent operating margin.

"We believe the deal pipeline is robust. While HCL Tech will not match deal wins of March 2021 quarter of US$3.1 bn (new deal TCV), the overall wins will likely still be healthy," Kotak said.

As per the brokerage, investors' focus may be on – (1) reasons for revenue growth underperformance, (2) reasons why strong presence in the digital foundation is not translating into strong growth, (3) pricing irrationality in large deals, (4) ERD business recovery has been much lower than estimates and underperformed, (5) timeline of accrual of benefits from investments in geographical presence, (6) health of products business and capital allocation, (7) attrition rates and (8) acquisition strategy.

Brokerage firm Emkay Global Financial Services expects a 13.7 percent growth in sales and 11.4 percent growth in PAT YoY. EBITDA may grow 11.1 percent while EBITDA margin may fall 59 bps YoY.

"We expect adjusted EBIT margins (adjusted for a special bonus, Q4 EBITM was 20.4 percent) to decline by nearly 30 bps due to COVID impact and weakness in the product business. Profits are expected to grow 36 percent QoQ due to absence of one-time special bonus to employees," Emkay said.

Emkay expects the company to retain double-digit revenue growth guidance and 19-21 percent EBITM guidance for FY22.

"Deal wins, deal pipeline and pace of deal closures, the growth outlook for ER&D and the products business, demand outlook for major verticals like BFSI, manufacturing and healthcare, pricing environment, and attrition will be the areas of focus for investors," said Emkay.

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