Markets
Why HCL has some edge over TCS, Infosys
Summary
- HCL has limited exposure to troubled BFSI clients, and recent large deal ramp-ups in the BFSI vertical led to strong segmental growth of 6.9% sequentially in constant currency, contrary to weak growth at both TCS and Infosys lately.
Homegrown IT services major HCL Technologies reported its earnings for the March quarter (Q4FY23), with results largely along expected lines. The company’s revenue in constant currency fell 1.2% sequentially, which was slightly better than the consensus estimate of a 1.5% fall. The company’s IT and business services segment, which contributes to over 70% of the overall revenue, witnessed a sequential growth of 1.8% in constant currency. However, the software and engineering research and development (ER&D) business segment did not perform well as there was a delay in decision-making in discretionary spending by clients.
Looking ahead, HCL has guided for 6-8% year-on-year revenue growth in constant currency for FY24, with robust deal wins expected to drive revenue growth. During Q4, the company had signed ten large services deals and three software deals with the total contract value for new deals at $2.07 billion.
In the last quarter, earnings before interest and tax (EBIT) margin at 18.2% slightly missed consensus expectations of 18.4%. For FY24, the company’s management has guided for EBIT margin to be in the range of 18-19%, while maintaining its medium-term margin target of 19-20%.
Analysts at Nomura Financial Advisory and Securities (India) Pvt. Ltd. believe that HCL's biggest lever for EBIT margin improvement will be lower net hiring, especially of lateral or experienced candidates, as attrition continues to drop and demand moderates.
But given global macroeconomic uncertainties, HCL has seen earnings downgrades akin to peers Tata Consultancy Services (TCS) and Infosys Ltd. A slew of brokerages have trimmed their FY24 and FY25 earnings per share (EPS) estimates for the stock.
Even so, HCL is seen better placed than its competitors.
According to analysts at ICICI Securities Ltd, HCL has limited exposure to troubled BFSI clients, and recent large deal ramp-ups in the BFSI vertical led to strong segmental growth of 6.9% sequentially in constant currency, contrary to weak growth at both TCS and Infosys lately.
“Also, HCLT’s lower exposure to discretionary projects over Infosys and higher towards run side of the business, led to hardly any major project rampdowns or cancellations. As a result of these two factors, we expect HCLT to grow faster than both Infosys and TCS in FY24," said the brokerage house in a report dated 21 April.
Further, HCL's higher exposure to Cloud, which comprises a larger share of non-discretionary spends, offers a better resilience to its portfolio in the current context, with higher demand for Cloud, Network, Security, and Digital workplace services, as noted by analysts at Motilal Oswal Financial Services Ltd.
Also, HCL's stock is trading at ~15x FY25E EPS, offering a margin of safety, said the Motilal Oswal report.
In conclusion, while HCL has not been immune to earnings downgrades, the company is seen as better placed than its competitors, thanks to its limited exposure to troubled clients, higher exposure to Cloud, and strategic deal wins.
