HCL Tech Q1 results: What it means for the stock?

Hari Viswanath |BL Research Bureau | | Updated on: Jul 13, 2022

While IT stocks likely to remain under pressure till macro economic concerns and cost pressures abate, HCL may fare relatively better against its more expensive peers

HCL Tech Q1 results was in many ways a replay of what TCS reported last week—good revenue momentum but margins under pressure and attrition on the rise. However, as compared to TCS stock that corrected by nearly 5 per cent on Monday in reaction to its latest results, HCL Tech shares are down only by just over one per cent today. The reason—all major IT stocks including HCL Tech have corrected in sympathy with TCS from the time the latter announced its results last Friday. So to some extent, this mixed results from HCL Tech was factored into its share price.

Margins disappoint

HCL Tech’s reported revenue of ₹23,464 crore was in line with consensus. The disappointment was the operating profit which at ₹3,992 crore was around 4.5 per cent below consensus. Operating margin was at 17 per cent versus consensus expectations of 17.8 per cent.

Retaining its FY23 operating margin guidance of 18-20 per cent, the management indicated that the margin is likely to come in at the lower end of the range and they will provide an update at the time of Q2 results. Some analysts have expressed concerns on whether the company will achieve its margin targets, as impact of wage hikes will hit the company’s margins in Q2 (vs TCS which has already seen the impact in Q1).

However, management has noted that they have revenue and cost levers to optimise which in turn can improve margins.

In terms of underlying business, the momentum remains strong with company CEO Vijaykumar stating that he is more bullish on demand now versus that of previous quarter.

Company’s constant currency revenue growth for the quarter was at a decent 15.6 per cent Y-o-Y (very similar to TCS’ 15.5 per cent growth).

However, HCL Tech’s growth can be viewed as modestly positive than that of TCS as its performance also includes around 10 per cent of revenue share from its Products & Platforms segment which saw tepid performance during the quarter.

Excluding this, its services business, which accounts for 90 per cent of revenue, grew 19 per cent in constant currency terms Y-o-Y. Products & Platforms segment is a differentiated strategy that the company is pursuing as part of its over all business and this segment tends to have lumpy performance.

Company has retained its FY23 constant currency revenue growth of 12-14 per cent.

It appears that clients have not indicated any reduction in their IT spends so far despite slowdown concerns.

This, however, requires a close watch as things may turn quickly and start impacting performance few quarters down the line. Another thing to watch out for is the trend in attrition. The attrition increased to 23.8 per cent in Q1 FY23 against 21.9 per cent recorded in Q4 FY22.

What should investors do?

HCL Tech is currently trading at a PE of around 17 times (Bloomberg consensus). While results were mixed, its valuation offers some comfort.

Its current valuation is not too expensive when seen against its historical multiples (5 year average of 16 times) and also as compared to peers trading at much higher levels.

While HCL Tech margins are lower than that of its peers like Infosys and TCS, in terms of growth in the last five years it has been delivering similar to them.

For example, it has grown its EPS at a CAGR of 10 per cent in the last five years, similar to what TCS has delivered during the same period. While premium for some of the peers based on their margin profile may be justified, the gap is likely to shrink. Thus, while IT stocks likely to remain under pressure till macro economic concerns and cost pressures abate, HCL Tech shares may fare relatively better against its more expensive peers.

Existing investors can continue holding the stock.

Published on July 13, 2022
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