HCLTech reported very weak Q1 results with revenue missing consensus (Bloomberg) expectations by 2 per cent, and EBIT and EPS missing expectations by 8 per cent. This miss is quite significant. Running into the results, the stock has been weak (down 6 per cent in 5 trading days), underperforming tier-1 peers – TCS, Infosys and Wipro, which were down only 1 per cent in the same period. However, the extent to which it missed expectations, likely implies there may be more pain for a while.
While the management has re-iterated the FY guidance of 6-8 per cent year on year, constant currency (CC) revenue growth (6.3 per cent reported in the current quarter) and 18-19 per cent EBIT margin (17 per cent reported in Q1), investors may not be assuaged. Investors will look for more proof and corroborative indicators that it is achievable, and such data points are at least three months away till the Q2 results are reported.
The Q1 result was impacted by deferral of discretionary spending by few clients. This is reflective of caution prevailing amongst clients across geographies for the IT sector. Unlike a year ago, clients are now getting more choosy in IT spending and the budgets are on a tighter leash. This is unlikely to get fixed soon, given the global macro uncertainties.
Segment performance
Americas (North and South), which account for 64 per cent of revenues, delivered year-on-year CC growth of 7 per cent compared with 17 per cent last year. More importantly, revenues from the rest of the world (regions excluding Americas and Europe), which accounts for 7-8 per cent of revenue, de-grew 6 per cent (growth of 22 per cent last year), reflecting a stark slowdown. In terms of verticals, the communications/telecom vertical reported year-on-year CC revenue decline of 11 per cent (TCS, too, has reported weakness in this vertical). This vertical appears to be an area of weakness across companies. While in the case of other verticals and geographies, different companies are seeing pressure in different areas. As macro uncertainties persist, this may only get more broad-based across geographies and investors need to be mindful of that.
What should investors do
HCLTech currently is trading at a trailing PE of 20 times, and this is at a 8 per cent premium to its five-year average valuation of 18.5 times. At bl.portfolio, we had recommended a ‘accumulate on dips’ rating, when the stock was trading at ₹925 in September 2022 and a trailing PE of around 18 times. We believe that would be the valuation level to consider accumulating the stock again.
Published on July 12, 2023
