HCL Tech Q4 preview: Weak software segment to drag profit by 4-9% QoQ

HCL Tech Q4FY23 preview: The firm's Ebit margin is likely to decline on a QoQ basis to 18.1-18.6 per cent. This stood at 19.6 per cent in Q3FY23

Harshita Singh New Delhi
Margin headwinds may cap upsides for HCL Tech despite strong top line show
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IT major HCL Technologies is expected to deliver weak earnings for the January-March quarter of fiscal 2023 (Q4FY23) as seasonal weakness and a decline in the software segment (product & platform-P&P) will likely drag its performance, analysts said.  
Brokerages expect the company’s profit as well as Ebit margins to contract over the preceding quarter. Constant currency (CC) revenue could also decline 1-2 per cent sequentially (QoQ), while profit de-growth could be seen in the range of 4-9 per cent. SEE TABLE FOR YEARLY COMPARISON

The firm’s Ebit margin is likely to decline on a QoQ basis to 18.1-18.6 per cent. This stood at 19.6 per cent in Q3FY23.  
Key Monitorables: The management commentary on budget and client spending expectations, deal pipeline, demand environment, FY24 guidance and outlook on engineering and research and development and products business will be keenly watched out for. 

Here’s what top brokerages expect: 
Jefferies: The brokerage expects HCL Tech to deliver a revenue de-growth of 1.2 per cent QoQ in cc terms with a 1.3 per cent growth in the services segment, which will be more than offset by a 19 per cent cc decline in the P&P segment due to seasonal weakness. 

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Ebit margins are estimated to fall 100 bps due to lower margins for the P&P segment. The brokerage expects the company to give a revenue growth guidance of 5-7 per cent YoY in cc terms and margin guidance of 18.5-19.5 per cent for FY24. 
Kotak Institutional Equities: A sequential revenue decline of 2.1 per cent is likely driven by seasonal weakness in the products business, while a 1.5 per cent cc growth in services (IT services + engineering and research and development) aided by the ramp-up of large deals won in past quarters is projected. Though, this will be offset by ramp-downs in impacted verticals such as hi-tech and entertainment.

The products business is estimated to see a 23 per cent sequential cc revenue decline while this will be flat on a yearly basis. Ebit margin decline of 140 bps QoQ and increase of 20 bps YoY is likely due to a decline in the mix of product business. 
The brokerage projects a decline of 5-10 per cent in net new deal TCV on a yearly comparison due to delays in decision-making.

Sharekhan: HCL Tech could see a revenue decline of 1.2 per cent QoQ in cc terms with a likely 90 bps cross-currency tailwind that would lead to a fall of 0.3 per cent QoQ in dollar revenue. Due to weakness in the software segment, the Ebit margin is expected to decline by 150 bps sequentially. 
Motilal Oswal: The brokerage expects the company to see strong growth in the IT services segment for the quarter. It has estimated a QoQ margin decline of 150 bps, while for revenues, the brokerage expects a muted growth of 0.6 per cent QoQ in cc terms. 

PhillipCapital: The brokerage projects cc revenue decline of 1.9 per cent sequentially, and a dollar revenue fall of 0.5 per cent QoQ. IT sees IT services to grow by 2.3 per cent QoQ helped by deal ramp-ups while P&P revenue may decline by 22 per cent due to seasonality. 
Margins are expected to decline by 130 bps led by negative operating leverage of P&P business offset by growth in services and efficiencies. The brokerage expects the company to guide for 6-8 per cent growth in IT services and 18-20 per cent in Ebit margins for FY24.


HCL Technologies

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First Published: Apr 19 2023 | 9:32 AM IST

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