HCL Tech Q1 Review: Muted IT Services Growth A Concern; Margin Woes Remain, Say Analysts

Analysts flagged HCL Technologies Ltd. muted IT services business growth as a concern and expect margin to remain under pressure because of sustained supply-side challenges.

The Noida-based firm’s EBIT margin contracted to 17% as its profitability in the IT services segment fell 150 basis points. The company, however, has retained its margin outlook between 18% and 20%, and revenue growth guidance of 12-14% in constant currency.

Key Highlights Q1 FY23 (QoQ)

  • Revenue increased 3.84% to Rs 23,464 crore, compared with the Rs 23,410.2-crore consensus estimate of analysts.
  • Revenue in dollar terms rose 1.1% to $3,025 million.
  • Net profit declined 8.63% to Rs 3,283 crore, against the Rs 3,325-crore forecast.
  • EBIT fell 1.89% to Rs 3,992 crore.
  • Declared an interim dividend of Rs 10 apiece.
  • Attrition inched up from 21.9% to 23.8% on last 12-month basis.

The company’s deal pipeline is at an all-time high, HCL Tech Chief Executive Officer C Vijayakumar said. “Customers are continuing with transformation programmes. We may see small projects getting deferred but there’s no structural impact.”

“We have put in place the right measures that will improve our profitability,” he said.

According to Chief Human Resources Officer Apparao VV, the company is still seeing heightened attrition and it “may increase” this quarter also.

Here’s what brokerages made of HCL Tech’s Q1 FY23 performance:

Motilal Oswal

  • Maintains ‘buy’, cuts target price to Rs 1,100, still implying a potential upside of 19%.
  • Disappointed by the weak growth in the IT services business, adverse seasonality (productivity pass-through), and high base (three straight quarters of strong delivery) indicate limited future read-through.
  • Continued strong deal TCV and pipeline commentary should help them improve growth in Q2. Expects HCL’s services business to do well in a favourable demand environment for cloud migration and R&D outsourcing.
  • Business has seen a meaningful contribution from relatively defensive work that is focused on cost efficiency and operations, but which should be less impacted.
  • Expects HCL to continue to struggle due to elevated supply-side issues and weak start to FY23, which will result in its EBIT margin missing the lower end of its guidance by 50 basis points, before recovering in FY24.
  • Valuations offer a margin of safety.

Emkay Financial

  • Maintains ‘buy’, cuts target price to Rs 1,100, implying a potential upside of 18.6%.
  • Broad-based demand, robust deal intake and a near record-high pipeline augur well for revenue acceleration.
  • Pressure on services business margins remains a concern, and execution on margin recovery will be key for the stock’s performance.
  • Valuations are reasonable.
  • Despite weak margins in Q1, it has retained 18-20% EBIT guidance for FY23, factoring in anticipated improvement in margins in coming quarters.

Dolat Capital

  • Maintains ‘buy’ at a target price to Rs 1,120, implying a potential upside of 21%.
  • Lower profitability affected Q1 performance, and tone-down in operating margin outlook makes us skeptical on margin recovery road map, particularly in light of weakening global macros.
  • Broad, qualitative commentary on demand, pipeline and industry tailwinds on digital transformation are indeed positives, but the same is not reflected from key lead indicators such as TCV/headcount addition acceleration.
  • Initiatives such as freshers hired from FY22 turning billable, lateral hires remains to be seen as to how they will play out.
  • Margins may remain under pressure given the sustained supply-side issues and return of discretionary spends in coming quarters.

Morgan Stanley

  • Maintains ‘equal-weight’ stance at a target price of Rs 1,300.
  • Revenue beat was more than offset by the margin miss and expectations of F23 margin toward the lower end of the band.
  • Company requires sharp execution to manage margins; there could be downside risks.
  • Sees consensus F23/F24 margins coming down, driving EPS estimate cuts.
  • Lower FY23-24 earnings-per-share estimates by 7-9% and target price by 9%. Prefers Infosys.


  • Maintains ‘neutral’ stance, cuts target price to Rs 1,000
  • Margin miss, deal wins hit in Q1.
  • Sees HCL likely missing its margin guidance in FY23, revenue guidance has lower risks.

HDFC Securities

  • Maintains ‘add’ stance at a target price of Rs 1,215, implying a potential upside of 21.2%.
  • Key positives included strong growth in ERS and growth ahead supported by two large ERS deals; positive commentary on the deal pipeline and net new bookings tracking higher providing growth visibility; and availability of margin levers supporting expansion from Q1 base.
  • Weaker elements included a softer sequential trajectory in services as well as a higher impact on IT and BS services margin (partial impact of Q1 seasonality + higher subcontracting expenses).

IDBI Capital

  • Maintains ‘hold’ at a target price of Rs 924, implying only a slight downside.
  • Expects FY23 revenue growth to remain robust led by a healthy deal pipeline, macroeconomic challenges will have an impact on FY24 revenues.
  • Revised revenue and EBIT estimates downwards leading to EPS downgrade of 5% in FY24. This coupled with product headwinds prompt IDBI Capital to revise its multiple downwards.
  • Expects HCL to face headwinds to margins mainly led by salary hikes, higher discretionary cost, impact of lower product revenues and investments. Hence, near term margins to remain under pressure.
  • Expects margins to improve by 50 basis points in FY24 with easing of supply-side pressure, higher product revenues and operating efficiencies.

Nirmal Bang

  • Maintains ‘sell’ at a target price of Rs 866, implying a downside of 7%.
  • Margin has been guided to come in at the lower end of the range, indicating that extraction of price increase from clients was taking longer than expected and that there were some unanticipated outsourcing and subcontractor costs.
  • Revenue growth is not as much at risk in FY23 as margin. Delivering 18% EBIT margin for FY23 may be challenging as price increases are likely more difficult to come by in the quarters ahead.
  • HCL Tech will also feel the negative impact of the stagflationary environment developing in the western world, which will likely affect tech spending in the second half of FY23 and FY24.

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