HCL starts FY25 on a soft note; bumpy path ahead
- The large-cap IT company’s revenue declined 1.6% sequentially in constant currency terms. Among verticals, manufacturing, financial services and life sciences were the other drags.
HCL Technologies Ltd’s June quarter (Q1FY25) results were subdued on some crucial parameters. The large-cap IT company’s revenue declined 1.6% sequentially in constant currency (CC) terms. The key segment IT and business services’ CC revenue dropped 1.5% sequentially, primarily due to seasonality, which was anticipated. Among verticals, manufacturing, financial services and life sciences were the drags. On the other hand, telecommunications and retail did well, helping to contain the revenue drop. Among geographies, Europe was a big disappointment last quarter and revenues from the Americas were muted.
The management commentary points to a likely revenue recovery. In Q2FY25, HCL expects revenue to return to sequential growth despite the impact of the divestment of the State Street subsidiary.For FY25, the company has retained 3-5% year-on-year CC revenue growth guidance for overall business as well as for IT services.This guidance does not factor in any improvement in year-on-year discretionary expenditure. The revenue guidanceimplies 0.9% to 2.3% CQGR (compound quarterly growth rate) over Q2-Q4FY25, said HDFC Securities.
Read | Is TCS’ stellar revenue performance a one-quarter wonder?
Apart from the seasonal strength in some upcoming quarters, achieving this target would also depend on the pace of revival in important verticals such as banking, financial services and insurance (BFSI). Note that the BFSI spending remains dominated by cost optimization deals and HCL’s headcount reduction was owing to the State Street exit. “HCL had significantly outperformed peers in the BFSI vertical in FY24, supported by large deals and several discretionary engagements. In FY24, HCL’s growth was heavily supported by BFSI growth with ex-BFSI revenue growth below TCS/Infosys—this now becomes a headwind for HCL in FY25E," added the HDFC Securities report.
The total contract value of new deal-wins was $1,960 million in Q1FY25, down 14% sequentially.Thedeal intake during the quarter was slightly lower than the management's expectations due to continued delay in decision-making in some programmes.HCL’s order book comprises both small and large deals. Going ahead, the management anticipatesgrowth momentum in thecore business to continue to be driven by execution of deals won over the last fewquarters.
Earnings before interest and tax (Ebit) margin declined 50 basis points sequentially to 17.1%, largely in-line with analysts’ expectations. One basis point is 0.01%. Higher employee costs weighed on the Ebit margin; however, lower subcontracting costs helped limit the margin drop. For FY25, the management has maintained its margin guidance of 18-19%. The company should report near the lower end of the guided range, said analysts at Motilal Oswal Financial Services.“We expect HCLT’s margins in IT services to recover in the next threequarters; however, there is an overhang of wage hikes for the year," it said in a report dated 13 July.The research house expects HCL to deliver 18.3% Ebit margin in FY25, which should recover to18.6% in FY26 as growth improves.
Also | IT: Margin recovery hopes need a reset too as revenue revival gets delayed
Meanwhile, so far in this calendar year, the HCL stock has risen by 5%, underperforming the Nifty IT index’s nearly 11% returns. On Friday, shares of many IT companies saw a positive rub off of Tata Consultancy Services Ltd’s (TCS) stellar Q1FY25 results. The HCL stock rose 3.3%.The shares now trade at a price-to-earnings multiple of around 23 times based on FY26 earnings, showed Bloomberg data.Peers TCS and Infosys Ltd are trading at multiples of 24 times and 27 times, respectively.The gap between HCL and competitors has narrowed lately.A further reduction would depend on HCL revenue growth trajectory and free cash flows.HCL's sharp re-rating has been driven by higher growth than peers and rectificationof its capital allocation policy, said Nuvama Research report on 12 July.
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