NEW DELHI, July 11
HCLTech is likely to report a 2% quarter-on-quarter decline in its revenue in the June quarter on the back of a combination of annual productivity pass-backs to clients and planned ramp-downs in IT services. The average of five brokerage firms expect HCLTech’s revenue to fall Rs 27,866 crore in April-June from Rs 28,499 crore in March quarter. The company will announce its Q1 earnings on July 12.
ICICI Securities has forecast a 1.9% revenue decline, emphasising the impact of productivity gain sharing in significant deals and also due to the absence of major deal announcements.
On similar lines brokerage firm Nomura said, “We expect constant currency (cc) decline of 2% q-q (quarter-on-quarter) due to annual productivity benefits to clients on renewals and offshoring of a large contract”.
The company’s management, too, had citied that increased offshoring pressures and ramifications from its significant deal with financial services firm State Street as key factors that could curb growth for FY25.
The decline in the revenue is naturally seen to pull the operating margins of the company. ICICI Securities anticipates a 60 basis point decline in earnings before interest and tax (Ebit) margin, primarily due to increased visa costs.
In the March quarter, the company’s margin dropped by a 2.2 percentage points sequentially to 17.6%.
Motilal Oswal Financial Services said, “For HCL, the margin contraction should be steeper due to seasonality in its software business,” expecting a margin contraction of 80 basis points. This contraction is largely attributed to the seasonal headwinds impacting the business.
As a result, the company’s net profit for the June quarter is expected to fall to Rs 3,444 crore from Rs 3,986 crore in the March quarter.
Despite the overall contraction, there are areas of potential growth. ICICI Securities expects traction in high-tech, manufacturing, and BFSI sectors, partially fueled by HCLTech’s recent acquisitions, such as assets in Hewlett Packard Enterprise. HCLTech in May had said it will acquire certain assets of Hewlett Packard Enterprise’s Communications Technology Group for $225 million, about Rs 1,874 crore, in an all-cash deal.
Furthermore, HCLTech’s strategic acquisitions, such as in the European auto ER&D services sector, will also likely bolster its capabilities and offerings. This is in line with the strong demand observed in the auto ER&D services, which has also seen movements from other major IT services peers.
On the deals front the brokerage noted, “Q4 had good Total Contract Value (TCV), but we expect some moderation in TCV, given the start of the year is typically slow for HCLTech”.
Meanwhile, Kotak Institutional Equities highlighted the cyclic nature of deal signings and suggests potential volatility, “While not impressive, TCV of TechM and HCLTech will be significantly above 1QFY24 levels due to a low base”.
Looking ahead, HCLTech is likely to maintain its fiscal 2025 revenue growth guidance of 3-5%, as noted by multiple analysts. This projection underscores a cautious but steady outlook for the company’s performance amidst market fluctuations.
The Noida-based company projected a subdued guidance for FY25 of just 3-5%, down from the 5-5.5% forecasted for FY24 and the operating margin is seen between 18-19%.
Investor Focus
Analysts advised investors to watch for management commentary on several key aspects, including updates on major deals like Verizon, FY25 revenue and margin guidance updates, and the integration of AI into products and platforms. The company’s strategic focus on sectors like banking and client discretionary spend will also be crucial.
Furthermore, the expected impact from the divestment of the State Street JV and recovery in discretionary spending in the services segment.
