Weekly tactical pick: why this IT services major looks interesting post correction
The current fiscal year may remain soft, but the company should benefit in the long run from enhanced technology budgets.
The stock of HCL Tech (CMP: Rs 1,348, Nifty: 22,404) has fallen close to 9 percent against a flat performance of the Nifty and the IT Index ever since the company reported its Q4 earnings in the third week of April.
We see this softness as a tactical opportunity amid the current volatility in the broad markets.
For FY24, the company delivered Constant Currency revenue growth of 5 percent, which was within its guided band of 5-5.5 percent growth.
The growth in Software was 2.3 percent. However, Services revenue growth of 5.4 percent was ahead of similar-sized peers.
HCL Tech reported an operating margin of 18.2 percent in FY24 — same as last year, and within the guided band of 18-19 percent. For Q4, the margins were sequentially lower — down 220 basis points sequentially and 50 basis points YoY at 17.6 percent, primarily because of weakness in software.
HCL Tech only announces new deal bookings. In Q4, the company bagged 21 new deals — 13 in services and 8 in software with a total contract value of $2290 million. For FY24, new deals bagged was of the order of $9.8 billion, up 10 percent YoY.
Although the management alluded to challenges in the demand environment, it is still having a healthy and growing order pipeline.
While overall results were a mixed bag with steady revenue and orders and a tad weak margin, what disappointed investors was the overall CC (Constant Currency) growth guidance of 3-5 percent as well as the services business for FY25.
The company expects a weaker than usual Q1 in FY25. In addition to the usual Q1 annual productivity pass-back to clients, the company expects revenue impact from the offshoring of a large deal. The second quarter, too, would have a revenue because of the divestment of the State Street business.
hile FY25 may turn out to be softer than expected earlier, HCL Tech remains a long-term beneficiary of enhanced technology budgets, including next generation technologies such as AI.
We would recommend adding the stock in its weak phase as valuation at 18.7X FY26e earnings look reasonable.
Bymoneycontrol
