Broker’s call: HCL Tech (sell)

Posted on by

Target: INR 990

CMP: Rs 1,109.20

HCL Technologies(HCLT IN) CC growth in the first quarter was (1.3) percent qoq, which is well below our estimate of 1.1% qoq and the average Street estimate of 0.8% qoq. The negative surprise from the services business — (1.0) percent qoq in CC’s growth in a weak quarter — weighed on HCLT.

ER&D services were hardest hit (-5.2% qoq in CC), with sharp declines in the telecom/technology sectors, down 14.4%/7.8% qoq in CC, respectively. The main reasons behind this were customer outflows, delayed decision-making, reduced discretionary spending and declining deal winnings.

Management has maintained a revenue growth forecast of 6-8 percent. This represents a CQGR demand rate of 2.9 to 4 percent, which we think is unlikely in a difficult macro economy. EBIT margin guidance of 18-19 percent is achievable given HCLT’s cost-defense measure (no bonus for seniors and deferment of bonus for mid- to lower-level employees by a quarter).

We take into account the disappointing performance in the first quarter and carry over to EPS ending June 25th. We cut fiscal year 24/25 EPS down 7% / 5%. With no change of heart, we have reverted the sale from Reduce and Pare to Rs 990 (from Rs 1,020).