After TCS and Infosys, will HCL Tech also disappoint Street in Q4?

After weak Q4 numbers from Indian IT majors Tata Consultancy Services (TCS) and Infosys, market participants will keep an eye on HCL Technologies, the third largest IT services company in the country, which is scheduled to release its fourth quarter earnings today.

Q4 is seasonally a weak quarter due to fewer working days and furlough impact in January. Analysts expect consolidated revenue to remain flat, and net profit to decline by 4.8 per cent sequentially.

Most brokerages are also expecting a sequential decline in constant currency revenue, and margins to contract for the January to March quarter.

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Investors will also keep a tab on the outlook for FY24, deal wins, deal pipeline and pace of deal closures. Management commentary on the demand outlook across verticals such as BFSI, Consumer, manufacturing, technology, Hi-Tech, retail and attrition trends will also be on focus.

The bearish projection comes at a time when earnings of Infosys and TCS have disappointed the Street. Both the IT majors have performed below par, and thus their stocks have seen some heavy selling in the last few days.

Profits, revenue and margins preview

Jefferies expects HCL Technologies to deliver degrowth of 1.2% QoQ (cc), with 1.3% QoQ (cc) growth in services segment more than offset by 19% QoQ (cc) decline in P&P segment due to seasonal weakness.

Domestic brokerage ICICI Direct expects HCL's IT services business to report 1% CC revenue growth for the quarter be aided by ramp up of deals but at the same time weakness mentioned by the company in their recent analyst meet in Hi-Tech and Media & Entertainment verticals are likely to have some impact in Q4.

"We expect 20% decline in revenues. At the company level, it expects to report 0.7% de-growth in revenues," ICICI Direct said.

Jefferies estimates EBIT margins to contract by 100 basis points due to lower margins for the P&P segment. Emkay Global sees EBIT margins declining by 120 bps sequentially on account of business mix change and sharp decline in software revenue.

On the margin side, ICICI Direct expects IT services margins to improve on pricing discipline, operational efficiencies while margins for P&P business are likely to see a sharp decline sequentially on seasonality. As a result, we expect company level EBIT margins to decline 140 bps QoQ.

Deal pipeline

The deal pipeline remains healthy, which is well distributed across large and medium sized deals. Deal signing has seen some moderation, especially in the Europe region where conversion of deals from pipeline to TCV may see some delay for the next couple of quarters.

Shares of HCL Tech closed 2.48 per cent lower at ₹1,037.50 apiece in Wednesday's trade. The stock has declined nearly 5 per cent during the past one year.