HCL Tech shares fall over 2% after Q1 results; should investors buy, sell or hold?


HCL Technologies reported 1Q22 revenue and margins below estimates on a higher-than-expected impact from the second wave, the proactive termination of contracts and an IP licensed partnership, CLSA said.

HCL Tech shares fall over 2% after Q1 results; should investors buy, sell or hold?
Shares of HCL Technologies fell over two percent in early trade on Tuesday after the company’s June quarter earnings failed to meet street estimates.
The IT major reported a consolidated net profit of Rs 3,214 crore in the first quarter of fiscal 2022, a growth of 8.5 percent as compared to Rs 2,962 crore in the previous quarter. Net profit was below CNBC-TV18 analysts’ poll estimates of Rs 3,253 crore
Revenue during Q1FY22 increased to Rs 20,068 crore from Rs 19,642 crore, QoQ, missing estimates of Rs 20,303 crore. Revenue in dollar terms, the company registered a sequential revenue growth of 0.9 percent at $2,720 million, against the estimates of two percent growth. Constant Currency revenue growth was at 0.7 percent, QoQ.
HCL Technologies maintains FY22 constant currency revenue growth guidance of double digits and FY22 EBIT margin guidance of 19-21 percent.
Here’s what brokerages have to say on HCL Technologies’ stock and Q1 performance:
HCL Technologies reported 1Q22 revenue and margins below estimates on a higher-than-expected impact from the second wave, the proactive termination of contracts, and an IP licensed partnership. While the revenue miss disappoints, we attribute it to transient factors and expect momentum to come back strongly in 2Q22, driven by the ramp-up of large deals won in 4Q21 and the clawback of 1Q22 revenue slippage, CLSA said.
Deal wins in 1Q22 were healthy (in-line with the past eight-quarter average) with an all-time high pipeline. Thus, while we trim our FY22/FY23F EPS estimates by 2 percent/1 percent, we maintain our ‘buy’ rating on attractive risk-reward at a 17x FY23CL EPS. Our price target moves up marginally from Rs 1,170 to Rs 1,180 as we roll-forward our valuation, it added.
Morgan Stanley
Q1 results stood out against peers in terms of slower QoQ growth. It gave a lack of positive surprises on FY22 guidance and a weak margin YoY. We expect large valuation discounts against larger peers to persist, Morgan Stanley said.
The brokerage maintained an ‘equal-weight rating on the stock with a target price of Rs 1,065 per share.
UBS believes that the Q1 miss is unlikely to please as FY22 guidance remains unchanged. It expects cuts to consensus forecasts, which could spur a negative reaction for the stock.
UBS has a ‘sell’ call with a target of Rs 855 per share.
Motilal Oswal
HCL Tech delivered a growth of 0.7 percent QoQ (CC), below our estimate of 2.4 percent, led by weak growth in IT Services and Products & Platforms, but partially compensated by better than expected ER&D. Excluding the impact of a one-time bonus in 4QFY21, EBIT margin was down 80 bps QoQ and missed our estimate by 130 bps due to COVID-related expenses of 90 bps, Motilal Oswal said.
We continue to see a higher potential for the Products and Platforms vertical in the medium term and expect it to return to double-digit growth in FY23E (we estimate 13.6 percent CC USD growth), it added.
We downgrade our FY22E/FY23E EPS estimate by four percent. We factor in a revenue miss and lower growth in the Products and Platforms business. We have reduced our margin estimate to factor in higher sales and marketing investments in FY22E. We maintain our ‘buy’ rating as we expect traction in the Services business in 2HFY22E and FY23E, driven by higher IMS/Cloud-focused deals. Our target of Rs 1,180 per share implies 20x FY23E EPS.
At 10:05 am, the shares of HCL Technologies were trading 2.26 percent lower at Rs 977.55 apiece on the BSE.
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