HomeEarningsQ4 PreviewHCL Tech Q4 Preview: Flat revenue, margin contraction expected as P&P declines

HCL Tech Q4 Preview: Flat revenue, margin contraction expected as P&P declines

On April 20, HCL Technologies (HCL Tech), an Indian multinational IT services company, is scheduled to announce its January-March earnings. Analysts anticipate consolidated revenue to remain unchanged and net profit to decline by 4.8% sequentially.

According to a brokerage poll, HCL Tech could report consolidated revenue of Rs 26,801 crore, up 18.6 percent year-over-year (YoY), and consolidated profit after tax (PAT) of Rs 3,898 crore, up 8.5% YoY. On a constant currency (CC) basis, the company is anticipated to report a quarterly (QoQ) decline between 1% and 2%.

The aftermath of the US banking crisis is being felt by Indian IT services firms, which have significant exposure to the banking, financial services, and insurance (BFSI) segment and derive a significant portion of their revenues from this sector, especially in the US and European markets. Kotak Institutional Equities estimates that HCL Tech’s exposure to the banking and financial services industry, excluding insurance, is 14%.

TCS recently reported CC revenue growth of 0.6% QoQ, the lowest in 11 quarters, whereas Infosys reported a revenue decline of 3.2% QoQ.

“For Q4FY23E, we expect HCL results to be the weakest in our coverage universe in terms of CC QoQ growth at just -1.9 percent due to weak seasonality in the products & platforms (P&P) business,” said analysts at ICICI Securities.

Motilal Oswal, a brokerage firm, predicts that HCL Tech’s software business will decline by 22 percent quarter-over-quarter, while the service segment will increase by 3.6 percent.

“We expect services / engineering, research and development (ER&D) / P&P growth of 3 percent / 3.5 percent / -21 percent QoQ in USD terms. We expect P&P revenues to decline by 4 percent YoY due to termination of HCL Tech’s DXC partnership in FY22,” according to JM Financial.

The brokerage poll predicts that earnings before interest and taxes (EBIT) will reach Rs 4,962 crore, an increase of 22 percent year-over-year. Annual EBIT margin may expand to 0.5 percent, but quarterly margin may contract by 1.1 percent.

“We expect EBIT margin to decline by 130 basis points (bps) QoQ due to decline in higher margin product revenue even while services will show an improvement in margins driven by improvement in utilisation,” says Asian Market Securities.

In addition, it anticipates that HCL Tech will provide revenue guidance for CC of 5-7 percent and margin guidance of 18-20 percent for FY24E.

Given the turmoil in Europe, investors will closely monitor HCL’s commentary on the tech spending outlook, particularly in the BFSI segment, the macro-demand environment, the deal pipeline, and large deal activity, as well as its outlook on product and ER&D businesses. The outlook for margin and attrition trends are additional factors to monitor.

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