Q1FY24 Review: HCL Technologies: Re-rating to take a step back post a weak Q1

13 Jul 2023 , 10:04 AM

HCL Technologies reported Q1FY24 USD revenue decline of 1.3% cc sequentially – sharply below IIFL’s estimates, driven by broad based decline across service lines. IT services was flat despite large deal ramp ups, ER&D declined 5.2% cc sequentially while P&P (down 3.1%) also could not show positive seasonality. EBITDA margins dropped to a decadal low of 20.5% (down 150 basis points sequentially) despite deferral of wage hikes. However, HCL Technologies still maintained FY24 revenue growth guidance of 6%-8% cc, implying revenue CQGR of 3.2%-4.6% and EBIT margin of 18-19%. They expect stronger conversion of deal wins in Q2 to help them achieve their guidance, after a 24% YoY decline in TCV to USD1.57 billion. 

Analysts at IIFL Capital Services see risks to HCL Tech’s guidance amid a challenging macro. They have cut their EPS estimates by 5-6% on lower growth and margin assumptions leading to a revised 12 month target price of Rs. 1,050 (from 1,200) pegged at 16X 2-YF P/E (versus 17X). HCL Tech is trading at 17.3X on FY25 estimated P/E, at a mere 5% discount to large caps, leaving limited headroom.