HCL Tech Q2 Results Example: IT giant HCL Technologies is expected to report healthy sales in the July-September quarter (Q2FY23) due to lower operating expenses, outsourcing costs and better pricing, analysts said. Higher attrition, however, will remain a damper and limit margin expansion.
Investors will look forward to an update on the FY23 growth outlook, E&RD and product business (P&P) outlook, deal pipeline, churn, leverages to defend margins and progress in onboarding 10,000 freshers announced in the prior quarter.
The company’s earnings before interest and tax (EBIT) margin is likely to grow 30-100 basis points sequentially from 17 percent. In the previous two quarters, the company’s operating margin has contracted by 200 basis points.
Despite such strong margin erosion, after its June quarterly results, HCL Technologies had said it could hit at least the low end of its 18-20 percent led margin by 2022-23 (April-March). .
Global brokerage firm Jefferies estimates an inorganic contribution of 20 basis points from the acquisitions of Confinale and Quest Informatics, both announced in May.
The company posted a consolidated net profit of Rs 3,263 crore during the corresponding period last year when the consolidated revenue came in at Rs 20,655 crore. HCL Tech had registered a PAT of Rs 3,281 crore on a turnover of Rs 23,464 crore during the period April to June 2022.
The brokerage expects the company to report quarterly (QoQ) revenue growth of 3 percent in constant currency (CC), led by 3.2 percent QoQ CC growth in the services segment and relatively lower growth of 1 percent in the product segment on seasonal weakness.
In its note, Kotak Institutional Equities said, “Headwinds from wage revisions and attrition costs will be more than offset by an increase in occupancy, pyramid and price improvement.”
The Street also expects HCL Tech to maintain its FY23 forecast of 12-14 percent constant revenue growth in currency and an EBIT margin of 18-20 percent. Total contract value (TCV) of net new deals in the quarter is expected to be $2 billion.
Kotak sees TCV gain from net new deal at over $2 billion. Net profit growth will be negligible year on year as tax rates normalize to 24.5 percent from a low of 20.5 percent in the September quarter last year.
Investors will be watching closely management’s comments on the demand outlook in light of macroeconomic headwinds.
“HCL Tech relies on big deals for growth. So we will be watching for deal activity in the market. Trends in the ER&D business are also important to monitor as the segment is discretionary heavy and prone to austerity when slowing down,” Kotak Institutional Equities said in the report.
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