HCL Technologies Ltd (HCL Tech) Q3 results came more or less in line with expectations. Even as the IT major narrowed its revenue guidance, analysts said the hurdle rate for HCL Tech to now re-rate is higher than its peers, given it has achieved valuation parity with large peers such as TCS and Infosys. The slower ramp-up of discretionary deals in Q4 is a dampener, they said.
HCL Tech upgraded its FY25 growth guidance to 4.5–5 per cent, with 50 basis points (bps) of inorganic contribution, essentially translating to organic revenue growth guidance of 4–4.5 per cent from 3.5–5 per cent CC YoY earlier.
"However, Q4FY25 is expected to be soft due to a large project ending and planned reduction in another project. HCL Tech’s guidance too implies required QoQ growth of -1.3 per cent to +0.6 per cent in Q4FY25. This soft exit rate is also likely to impact FY26 growth," Nuvama said.
The IT company's management retained its FY25 margin guidance of 18–19 per cent. In the third quarter, EBIT margin expanded 90 basis points (bps) sequentially to 19.5 per cent. IT services margin declined 22 bps QoQ due to wage hike (down 80 bps), furloughs (down 40 bps) and acquisition integration (down 20 bps), which was offset by operating efficiency measures (up 100 bps) and forex benefit (up 18 bps). Total contract value grew 9 per cent YoY.
MOFSL said HCL Tech’s Q3 numbers and Q4 guidance were underwhelming. The implied organic growth rate for IT&BS in Q4 is 0.6 per cent in CC at the upper end of the guidance, it said adding that the management attributed this to a planned ramp-down in the Verizon deal and some project completions.
However, in an environment where short-cycle deals are gaining momentum, the slower ramp-up of discretionary deals in Q4 is a dampener, MOFSL added.
"We previously argued HCLT should trade at a roughly 10 per cent premium to Infosys. This was owing to its superior outperformance to its peers over the past 2-3 years, with improving capital allocation and free cash flow metrics. Valuation parity is now achieved for the big three—HCLT, TCS, and Infosys. The hurdle rate for HCLT to now re-rate is higher than its peers," it said.
MOFSL maintained its 'Buy' and suggested a target of Rs 2,100.
Nuvama said it continues to like HCL Tech’s solid growth, high FCF generation and capital allocation. However, with the stock trading at 28.5 times FY26E PE and discretionary-focused peers such as Infosys available at a discount, it finds limited upside potential. The brokerage downgraded the stock to Hold and suggested a fresh target price of Rs 2,150.