HCL Tech follows Infosys, cuts FY24 guidance. Can its shares sustain 2023 gains?

After Infosys Ltd, it was HCL Technologies Ltd that announced a cut in its FY24 revenue growth guidance while announcing its September quarter results, casting concerns over the IT outlook for the rest of the financial year. Analysts were surprised by the lowering of guidance; they wondered if a drop in discretionary demand has started to hurt the IT firm. A downward revision in revenue guidance indicates a longer time to growth recovery, despite strong deal wins, they said.

HCL Tech reduced its CC revenue growth guidance to 5-6 per cent from 6-8 per cent earlier but maintained its Ebit margin of 18-19 per cent, which analysts said is achievable. The revised revenue growth guidance implies 3.3-4.5 per cent compounded quarterly growth rate for the next two quarters.

"We lower FY24-26F EPS by 1 per cent driven by the miss in 2QFY24. Our FY24-26F EPS are 2-3 per cent lower than the Street. We cut target by 1 per cent to Rs 1,200 based on 3-staged growth model," Nomura India said. The brokerage prefers Tech Mahindra in the large-cap space.

Nuvama Institutional Equities said HCL Tech's Q2 performance was decent and that the guidance cut, though sharp was largely expected.

"Even on reduced guidance, it is likely to be the fastest-growing large-cap (in IT Services). Its decent growth in Services and lower exposure to the troubled BFSI (23 per cent) segment imply high probability of stable earnings growth. A high dividend yield and inexpensive valuation (18.5x FY25E PE) provide a floor to the stock price," the domestic brokerage said.

Shares of HCL Tech have gained 18 per cent in 2023 so far against a 4 per cent drop in shares of Infosys and 9 per cent rise for TCS. The HCL Tech management expects revival in H2FY24 given ramp-up of large deal, seasonality benefit for software in Q3 and some recovery in discretionary spending by clients.

"We estimate healthy revenue/PAT CAGR of 8 per cent/9 per cent over FY23-26E. The stock trades at a reasonable valuation of 19.4 times/17.5 times its FY25E/26E EPS. Hence, we maintain Buy on HCL Tech with revised price target of Rs 1,400 (increase in PT reflects rollover of valuation multiple to FY26E EPS)," Sharekhan said.

For the December quarter, Dolat Capital expects a strong revenue growth of 4.9 per cent sequentially, led by Software vertical on positive seasonality. It sees HCL Tech's margins to dip 35 basis points QoQ, due to impact of impending wage hikes for mid and junior employees effective in Octover.

"We expect that macro volatility will continue to weigh in on IT Services for near future, and thereby moderating Revenue momentum. We expect HCL Tech to deliver moderate revenue momentum over next 2-4 quarters (translating into mid-single digit revenue growth) and expect it to sustain current valuations of 16-19 times which implies 2 times on PEG basis," it said while suggesting a target of Rs 1,210 on the stock.

Also read: Stocks in news: Infosys, RITES, Paytm, Persistent Systems, IRCON and more

Also read: GIFT Nifty up 12 points: Asian markets, crude oil prices, dollar movement, Q2 earnings & more