TCS, HCL Tech Q1 results: How their share prices may react after quarterly earnings?

IT giant Tata Consultancy Services (TCS) may escape the wrath of bears on Thursday's trading session as it surprised streets by reporting solid Q1 earnings for FY24 despite some pressure in margins, although volatility will be seen in the stock price. The second largest firm in terms of market share even slightly surpassed estimates in June 2023 quarterly results. But this may not be the case for HCL Tech which has shown signs of struggle and missed street estimates across parameters. Both tech biggies' stock prices ended in the red on Wednesday's trading session as traders showed a cautious tone.

On BSE, TCS' share price closed at ₹3260.20 apiece, down by ₹11.65 or 0.36%. While HCL Tech shares dipped marginally by ₹4.65 or 0.42% to end at ₹1110.05 apiece on Wednesday.

Both IT giants have announced an interim dividend for their shareholders from the Q1 net profits for FY24.

TCS has declared the first interim dividend of ₹9 per share and fixed a record date on July 20 to determine eligible shareholders, while the payout will be carried out on August 7, 2023. Meanwhile, HCL Tech declared a dividend of ₹10 per share for which the record date is also July 20, and the payout date is fixed on August 1, 2023.

Siddharth Bhaisora, Investment Advisor at Wright Research said, "Both TCS and HCL Tech have shown resilience in navigating the challenging global macroeconomic headwinds & recessionary trends, but their recent performances display contrasting trends."

Here's what will dictate the share prices of TCS and HCL Tech on Thursday after Q1 numbers.

Tata Consultancy Services (TCS):

TCS reported a consolidated net profit of ₹11,074 crore in Q1FY24 which was up 16.8% YoY while the company's revenue for the quarter stood at ₹59,381 crore, rising 12.6% YoY. The company's revenue growth in constant currency terms rose 7% YoY. The operating margin during the quarter under review expanded modestly by 0.10% YoY to 23.2%.

In terms of industry-wise, growth was led by Life Sciences and Healthcare which grew 10.1%, and the Manufacturing vertical which grew 9.4%. BFSI grew 3%, Retail and CPG grew 5.3%, Technology & Services grew 4.4% and Communications & Media grew 0.5%.

On a geographical basis, among major markets, the United Kingdom led with 16.1% growth; North America grew 4.6% and Continental Europe grew 3.4%. In emerging markets, Middle East & Africa grew 15.2%, India grew 14%, Latin America grew 13.5%, and Asia Pacific grew 4.7%.

The Tata Group-backed company added 523 employees in Q1, taking its workforce strength to 615,318. While its LTI IT services attrition stood at 17.8%.

According to Bhaisora, TCS has shown solid performance, meeting, and even slightly surpassing estimates despite some margin pressure. Its total contract value of $10.2 billion bodes well for future revenues, while the commitment to investing in emerging technologies indicates an ambitious growth strategy.

Also, he added that given these performances, investors may want to hold onto or even increase their positions in TCS given its robust order book, and its focus on innovation and emergent technologies, which could potentially drive future growth.

Meanwhile, Dhruv Mudaraddi, Research Analyst, Stoxbox said, "Considering the overall dull environment of the IT sector led by a cut in the discretionary spending in the US and the UK, we are positively surprised with TCS reporting a 12.6% YoY growth in its revenue in INR terms and 7% in constant currency terms. This was led by robust growth in its Life Sciences & Healthcare and Manufacturing verticals which clocked in a growth of 10.1% and 9.4%, respectively."

On the margin front, Mudaraddi added, "As per our expectations the wage hike effect led to a margin contraction of 132 bps on a sequential basis. The profitability and no significant deterioration in verticals has surprised us on the upside, especially against the backdrop of events unfolding globally."

Going ahead, Mudaraddi said, "We expect the management to work further on the operational efficiencies and view these mixed numbers with a positive bias for the IT industry."

Coming to the share price, SAMCO Securities has revealed an interesting fact that there's a stat which shows TCS falls 75% of the time the next day after the results.

TCS shares remained volatile the following day and the following week after the quarterly results are declared.

The share price of TCS has fallen 9 out of 12 times the following day of quarterly results, Samco Securities research added that in the following week, the drop is in 7 instances.

HCL Technologies:

HCL Tech posted a consolidated net profit of ₹3,534 crore, which is attributable to shareholders, in the first quarter of FY24, rising by 7.65% year-on-year. Consolidated revenue from operations jumped by 12.06% YoY to ₹26,296 crore in the quarter. On a constant currency basis, the revenue was down by 1.3% QoQ but up by 6.3% YoY.

In the quarter, the company's TCV (new deal wins) stood at $1,565 million. While the overall pipeline is at an all-time high, grew by 17.7% QoQ and 26.2% YoY. Further, HCL Tech let go of 2,506 employees in Q1FY24, as the total headcount reached 223,438 people as against 225,944 employees in Q4FY23. Meanwhile, the tech player's LTM attrition rate dropped by 7.5% YoY to 16.3% in Q1 of the current fiscal.

HCL Tech's full-year FY24 guidance includes revenue growth to be expected between 6% to 8% YoY in constant currency terms. Further, services revenue growth in CC is expected to be between 6.5% to 8.5% YoY. EBIT margin is estimated to be between 18% to 19% for the fiscal.

In case of HCL Tech, Bhaisora said, the company's recent performance, on the other hand, shows some signs of struggle, with a decrease in net profit and EBITDA margins, and muted growth in what is usually a strong quarter for the sector. This suggests that the company is facing some challenges. However, the company's CEO is expecting an improvement in other verticals, and the firm has retained its revenue growth and operating margin guidance for FY24.

Further, Bhaisora believes for HCL Tech, it might be prudent for investors to exercise some caution in the near term, they should monitor the company's performance over the next few quarters due to some signs of struggle. However, the management's optimistic outlook and strategic emphasis on diverse verticals could bode well for the future, suggesting potential upside.

Moreover, Mudaraddi said, India’s third largest IT services firm, HCL Technologies Ltd reported a subdued performance, missing street estimates due to the weak demand environment which the IT sector as a whole is facing due to recession fear across the globe.

However, some of the positive takeaway was that the company was able to generate double-digit annual growth in its large verticals such as financial services, manufacturing, life sciences and healthcare due to some large deals win. This helped the company to offset cuts in the clients’ discretionary spending, as per Mudaraddi.

Finally, Mudaraddi said, “The company is optimistic that the past has gone and expects a gradual recovery in their business supported by growth in other verticals as well. This has led the company to provide unchanged revenue growth guidance of 6-8% YoY in constant currency terms for FY24, with EBIT margins also remaining unchanged in the range of 18-19% for FY24.”