The share price of HCL Technologies tanked over 5 per cent in morning trade on Monday after the company reported a nearly 14 per cent YoY decline in net profit for Q3 FY2022 despite a strong deal pipeline.

At 11:27 am, HCL Technologies was trading at ₹1,264.40 on BSE, down ₹73.15 or 5.47 per cent. It had opened at ₹1,276.00 as against the previous close of ₹1,337.55. It recorded an intraday high of ₹1,276.00 and a low of ₹1244.00.

On the NSE, it was trading at ₹1,264.30, down ₹72.90 or 5.45 per cent.

The company reported a decline in its consolidated net profit by 13.6 per cent year-on-year (YoY) at ₹3,442 crore in the third quarter ending-December, as compared with ₹3,982 crore in the corresponding period of the previous year. However, its revenue grew by 16 per cent to ₹22,331 crore in the October-December quarter under review, as against ₹19,302 crore in the same period of 2020.

The company, however, expects a strong deal pipeline on the back of robust demand environment. Sequentially, its revenue increased 8.1 per cent and net profits rose 5.4 per cent.

Its Ebit margin stood at 19 per cent, up 8.5 per cent QoQ and down 3.7 per cent YoY.

The company expects revenue to grow in double digits in constant currency for FY’22, while the EBIT margin is expected to be between 19 per cent and 21 per cent for FY’22.

Separately, its board of directors have declared an interim dividend of ₹10 per share at its meeting held on 14 January 2022.

Mixed reviews from brokerages 

The company has received mixed reviews from bokerages. While the decline in net profit and margin disappointed, brokerages expect growth momentum to continue on the back of a strong deal pipeline and increase in demand.

ICICI gave the stock a reduce rating at the target price of ₹1,150.

“Though growth was broad-based, performance was largely on the back of a strong traction in the products & platform (P&P) segment, which grew 24.5 per cent QoQ (CC). The services margin for Q3FY22 declined 190 bps QoQ, largely due to wage hikes and supply-side challenges, which was fully offset by positive operating leverage in the P & P segment, resulting in overall margins being flat sequentially,” it said.

“Management called out a downside risk to their EBIT margin guidance of 19-21 per cent for FY22 due to the need for increased investments. This corroborates our argument that the industry is unlikely to see any meaningful margin expansion in the new normal (vs pre-covid). Notably, margins are below pre-Covid levels with a higher intensity of cost headwinds in the foreseeable future (e.g. attrition, travel etc.),” It added.

Motilal Oswal Research, on the other hand, expects growth acceleration to compensate for margin hit. It gave the stock a Buy rating, citing a 26 per cent upside at a target price of ₹1,690.

*The margin outlook on IT services was below our estimate as HCLT continues to struggle to absorb the impact of an adverse supply scenario. While it will be raising prices across accounts, we expect the margin to stay at the lower end of its current guidance for FY23 before recovering in FY24,” it said.

It lowered its FY22E EPS estimate by 1 per cent due to the margin hit, but raised the same for FY23 by 2 per cent due to growth acceleration.

“Given its deep capabilities in the IMS space and strategic partnerships, investments in Cloud, and Digital capabilities, we expect HCLT to emerge stronger on the back of an expected increase in enterprise demand for these services,” it said.

Anand Rathi citing “continuity of robust growth across Mode-2 and Mode-3 business, expects the growth momentum to continue supported by “strong products, deal pipeline and ramp-up of large deals.” 

It maintained a Buy rating on the stock, with a revised target price of ₹1,550 per share.

Yes Securities also maintained a Buy rating with revised target price of ₹1,556.

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