Street Gives Thumbs Up To HCL Tech's Q4 Results. Why This IT Firm Can Deliver Better Earnings Than TCS, Infosys In FY24?

Nifty IT index jumped by 185 points or 0.70% to end at 26,822.10. TCS emerged as the top gainer with an upside of 1.75% followed by Wipro and HCL Tech which advanced by 1.4% and 1% respectively. Infosys was marginally up as well. However, Tech Mahindra was the top loser with a downside of 2.3%.

HCL Tech witnessed 10.85% YoY growth in consolidated net profit to ₹3,983 crore in Q4FY23 but was down by 2.8% QoQ. Consolidated revenue stood at ₹26,606 crore up by 17.74% YoY but dipped marginally. In constant currency terms, revenue dropped by 1.2% quarter-on-quarter but rose by 10.5% year-on-year.

Surprisingly, HCL Tech posted 6.9% QoQ growth in Q4FY23 in BFSI verticals. On the contrary, Infosys saw a drop of 3.7% sequentially. However, TCS' BFSI business continued at a slower pace and witnessed a growth of merely 9.1% YoY cc.

Additionally, in North America where the banking crisis first broke out in March 2023, HCL Tech saw 1.8% QoQ growth in CC, while Infosys and TCS reported qoq revenue declines of 3.8% and 0.8% respectively in the region.

On these tech giant's Q4 performances, ICICI Securities analysts in their research note said, "HCLT’s limited exposure to troubled BFSI clients and recent large deal ramp-ups in the

BFSI vertical led to strong segmental growth of 6.9% QoQ CC, contrary to weak growth at both TCS and Infosys lately. Also, HCLT’s lower exposure to discretionary projects over

Infosys and higher towards run side of the business, led to hardly any major project ramp-downs or cancellations."

Post HCL Tech Q4 results, Religare Broking in its note said, "for the near term, challenging macro and delay in deals may impact growth. However HCL Tech is better placed than peers in the medium to long term because of lower attrition as compared to peers, its large deals momentum in service business and new projects from Europe region will aid growth."

As per Religare, HCL Tech is well diversified across its portfolio and has a balance of cost optimization and vendor consolidation products which help clients to choose according to its requirement. Besides, its strong deal across geography, verticals and offerings as well as improving utilization and cost measure will aid margin improvement going ahead.

Along similar lines, ICICI Securities expects HCL Tech to grow faster

than both Infosys and TCS in FY24.

Brokerage's note said, "We estimate HCLT growth at 7.9% YoY in CC terms for FY24E, close to the top end of the guidance of 6-8%. As a result, we increase our revenue forecasts over FY24E-FY26E by up to 2% each year. On EBIT margin, we have lowered our outer year assumptions due to the company’s higher focus on cost take-out

deals in which margins are lower. Due to our higher tax rate assumption, we lower our

FY24E-FY26E EPS forecasts by 2-5%."

Further, in its note, Emkay Global said that HCL Tech is well-positioned to weather the storm, given its comprehensive service offerings and well-balanced portfolio across RTB and discretionary spends.

On stock price, Emkay said, "We have cut our earnings estimates by 1.9-2.8% for FY24E/25E, factoring in Q4 miss and higher ETR. We maintain our BUY rating with a TP of Rs1,150/share at 17x Mar-25E EPS (earlier 1,160)."

Also, Religare's note said, " HCL is trading at a comfortable valuation and we have assigned a P/E of 18x FY25E EPS and have maintained a Buy rating with a Target price of ₹1,333."

On the contrary, ICICI Securities has maintained a HOLD rating on HCL Tech with a revised 12-month target price of Rs1,065. This implies a 3% potential upside wherein the stock may react positively to HCLT’s results given the management’s better growth guidance than Infosys and no mention of project cancellations / ramp-downs.

For the fiscal FY24, HCL Tech has guided revenue growth to be between 6% to 8% in CC terms. Services revenue growth is expected in the range of 6.5% to 8.5% for the full year. While the EBIT margin is seen from 18% to 19%.