HCL Tech share price hit new 52 weeks low falling 7.2% before Q1FY23 Results

HCL Technologies Ltd. is a leading global IT services company that assists global enterprises in reimagining and transforming their businesses through the use of digital technology. The company primarily provides software services, business process outsourcing, and infrastructure services.

As the Q1FY23 results season has begun, companies have started releasing their financial performance. TCS was the first large IT company to publish its Q1FY23 financial results, which are available to read on our website. HCL Tech was the next IT company to declare results on July 12, 2022. The results displayed a 17 % YoY increase in sales and a flat YoY growth in net profits.

Before results were announced, HCL Tech shares lost approximately 7.2 % in the previous three trading sessions, hitting a new 52-week low of Rs 924. This underlines the unfavourable investor sentiment and negative predictions for the IT sector in Q1FY23. Now let’s examine HCL Tech’s Q1FY23 in more detail and determine its future course.

HCL Tech reported a 17% YoY growth in net profits

The consolidated revenue of the IT major HCL Tech witnessed a YoY growth of 16.9% at Rs 23,464 crore as against Rs 20,068 crore reported in Q1FY22. On a sequential basis, the revenue increased 3.83% in Q1FY23 in comparison with the Rs 22,597 crore reported in Q4FY22.

With cloud adoption being a horizontal theme across all services and verticals, the company’s services business continued to deliver an increasing growth trajectory, expanding by 19% YoY and 2.3% QoQ in constant currency. This growth was driven by digital engineering and digital application services.

The products and platform businesses at HCL Tech also experienced a comeback, increasing by 5.6% QoQ and 1.4% YoY in constant currency. On bookings and pipeline, new bookings grew 23.4% YoY, supported by a good mix of large and mid-sized deals, and the pipeline remains near a record high. “We’ve started FY23 on a strong note with a healthy performance in Q1,” C. Vijayakumar, CEO and MD, said. “Our revenue growth this quarter came in at 2.7% sequentially and 15.6% year-on-year in constant currency.”

HCL Tech reported flat YoY growth in net profits on the account of an increasing attrition rate

HCL Tech reported a 2.11% growth in its consolidated PAT (profit after tax) at Rs 3,281 crore, compared to Rs 3,213 crore reported in Q1FY22. Sequentially, the profit declined by 8.83% from Rs 3,599 crore reported in Q4FY22. While the PAT margin, which was above 15% in the last 5 quarters, came in below at 14% in Q1FY23. Prateek Aggarwal, Chief Financial Officer, HCL Technologies Ltd., added that the company’s board has approved a dividend of Rs 10 per share in accordance with the Capital Allocation Policy.

“When it comes to margins, we posted an EBIT performance of 17% this quarter. Margins in the services business are under pressure, mainly due to increased talent costs and transaction costs. We have taken appropriate actions to improve our profitability profile. The results of which would start reflecting in the coming quarters, “said Mr. Vijayakumar. He also added that the margin-improvement initiatives include both revenue and cost levers led by innovative pricing, rate increases, and optimization of the operating costs, both people and non-people costs.

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Attrition rate of HCL Tech almost doubled in a Year

At the end of Q1FY23, the company’s headcount stood at 2,10,966 employees, up by 2,089 employees from 2,08,877 employees at the end of Q4FY22, and higher by 34,467 employees as against 176,499 employees in Q1FY22. Moreover, HCL Tech’s attrition climbed to 23.8% in Q1FY23 versus 21.9% in Q4FY22 and 11.8% in Q1FY22.

The business previously announced its intention to hire 45,000 new workers in FY23. Employees from its new frontier locations, such as Sri Lanka, Vietnam, Romania, Mexico, Costa Rica, and Brazil, have also been outsourced.

HCL Tech started FY23 with Robust Deals win & Client Acquisition

In its guidance for FY23, HCL Tech said that revenue is expected to grow between 12-14% in constant currency. EBIT margin is expected to be between 18-20%. The reason for the same was strong deals cracked by HCL in Q1FY23. For the quarter, TCV (Total contract value) of new deal wins stood at $2.05 billion, registering a 23.4% YoY growth of this, Services TCV was at $1.95 billion enabled by seven net new large deal wins while products TCV was at $104 million, enabled by nine net large new product deals wins and a significant number of small deals.

Moreover, their ACV (average contract value) is higher by 17.9% on a YoY basis. Apart from that, HCL Tech also saw strong client additions across all categories. On a YoY basis, US$ 100 MN+ clients were up by 3, US$ 50 MN+ clients were up by 5, US$ 20 MN+ clients were up by 23, US$ 10 MN+ clients were up by 35, and US$ 5 MN+ clients up by 27, US$ 1 MN+ clients were up by 63.

Technical Analysis of HCL Tech share

HCL Tech is currently in a downtrend similar to its other IT peers, forming lower highs and lower lows. The 50 EMA is significantly below the 100 and 200 EMA, indicating bearishness. Moreover, HCL Tech has fallen more than 7% in the last few trading sessions and hit a new 52 weeks low of Rs 924.

After the announcement of Q1FY23 results, many brokerages housed updated their rating for the HCL stock. Motilal Oswal maintained their ‘buy’ rating as they expect traction in the services business in 2HFY22E and FY23E, driven by higher Cloud-focused deals. They kept a target of Rs 1,180 per share. Whereas brokerage Morgan Stanley maintained an ‘equal-weight rating on the HCL stock with a target price of Rs 1,065 per share. While the IT sector, overall, is facing severe headwinds, the depreciation of the rupee is still a positive for their exports.

Our View 

As Mr. Vijaykumar added, “We continue to remain very vigilant to see what’s happening in the environment, how it will impact us and how we can help our customers. All that remains very central to our strategy. ” Therefore, investors should wait until the IT sector rebounds and keep a close check on the Q1FY23 performance of other IT players to understand the future direction of the IT sector and its players.

The results of HCL Tech point to a trend in the IT sector, which is reflected in the results of TCS as well. Margins have been shrinking, and attrition is a major cause of concern. Employee retention is a big challenge in an environment of strong order books. One reason that many analysts believe the sector may underperform is a likely slowdown in spending in Europe on fears of a recession. Whether the rest of the IT pack follows the trend remains to be seen. On ray of optimism is that most IT stocks have corrected significantly since January 2022. There is a fair chance that the downside for these stocks will be limited from here.

HCL Tech’s reported Q1FY23 revenue andmargins were below estimates on a higher-than-expected impact from the second wave of COVID. Deal wins in Q1FY23 were healthy (in-line with the past eight-quarter average) with an all-time high pipeline. Therefore, it will be worthwhile to see if HCL’s stock bounces up from here in H1FY23.

 

About the Author

Ketan Sonalkar (SEBI Rgn No INA000011255)

Ketan Sonalkar is a certified SEBI registered investment advisor and head of research at Univest. He is one of the finest financial trainers, with a track record of having trained more than 2000 people in offline and online models. He serves as a consultant advisor to leading fintech and financial data firms. He has over 15 years of working experience in the finance field. He runs Advisory Services for Direct Equities and Personal Finance Transformation.

Note – This channel is for educational and training purpose only & any stock mentioned here should not be taken as a tip/recommendation/advice

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