Shares of HCL Technologies Ltd declined nearly 6 percent on Monday after the company reported lower-than-expected earnings before interest and taxes and reduced lower-end margins guidance by its management.
The stock hit a low of Rs 1,255.10 on the BSE, down 6 percent, intraday. At 9.17 am, it was trading at Rs 1,276 on the BSE, down 4.6 percent from its previous close.
EBIT margin for the quarter stood at 19 percent which was lower than what analysts had projected. This was impacted due to a 220 basis points on-quarter decline in IT services and 70 basis points QoQ fall in engineering R&D.
The management reiterated its double-digit dollar revenue growth guidance (including P&P growth of 0-1 percent YoY) but reduced its margin guidance to the lower end of 19-21 percent band (with a 10-20bp downside buffer). Its attrition rate for the quarter increased to 19.8 percent from 15.7 percent a quarter ago.
HCL Tech added 10,143 employees in the last quarter and the total headcount is now at 1,97,777.
Analysts say that the management was cautious on the near-term margin outlook due to continued talent crunch and high costs to backfill attrition and transition costs in large deals. This could cause the fourth quarter FY22 EBIT margin to drop to as low as 18 percent.
“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,” according to Motilal Oswal Research note.
HCL Tech reported a dollar revenue growth of 7.6 percent sequentially in constant currency to $2.97 billion for the December quarter, the fastest in almost 12 years. The record revenue was boosted by new deal wins and acceleration in clients’ digital spending.
It posted a net profit of Rs 3,442 crore in the quarter, a decline of 13.6 percent from a year earlier. The decline in profit was due to a one-time gain of lower tax expense last year in the same quarter. Revenue rose 15.7 percent from a year ago to Rs 22,331 crore.
The company also reported a strong total contract value (TCV) of new deal wins worth $2.13 billion, a 64 percent increase over the same quarter last year.
Analysts say that the trend of fastest growth to continue in the coming quarter as a robust TCV points towards a strong impending growth cycle
“Going forward, we expect the company to report healthy growth in IT services revenues mainly led by healthy deal wins. This coupled with strong client addition and net addition of 10,143 bodes well for revenue growth. In addition, we believe that with improvement in product business we expect margins to improve in coming quarters. Further, the company’s aim to increase the payout to 75 percent of net income for the next five years is key positives”, brokerage firm IDBI Capital in a note to its investors.
The brokerage has upgraded the stock to buy from hold and increased its target price to Rs 1545, up 16 percent from the earlier target price.