HCL Tech management cautious on revenue growth in FY23; stock plunges 6%

Shares of HCL Technologies tumbled 5.8 per cent to Rs 1,037 apiece in Friday's intra-day trade, after the company said it expected revenue in financial year 2022-23 (FY23) to come in near the lower end of the guidance band. 

At its investor meeting held in New York on December 8, the management said the revenue growth guidance for FY23 is likely to come in at the lower end of its 13.5-14.5 per cent year-on-year band in constant currency (CC) terms due to higher-than-expected furloughs in  BFSI and Hi-Tech segments.

According to analysts at Nirmal Bang, this doesn't seem to be an industry-wide problem and not an HCL Tech specific one. However, it believes that December 2022 and possibly March 2023 are likely going to be growth challenged quarters for the industry; may be a bit more than earlier anticipated.

"HCL Tech management commentary also highlighted another problem that we foresee in FY24 – pricing. It hinted that price increases are more selective now than they were 6-9 months back. We also believe that instead of a typical budget flush (because of a spend-it-or-lose-it condition), there is likely under-spending of budgets that could affect December, 2022, quarter revenue," the brokerage said.

Analysts at global brokerage Nomura, too, believe tech budgets are linked to revenue growth of enterprises, indicating further slowdown in demand in the coming quarters. In particular, BFSI, manufacturing and technology verticals have seen the most decline in the past three months. 

"For Indian IT services companies, the pain is likely to be more pronounced in interest rate-sensitive sectors like mortgage, capital markets in the BFSI vertical, discretionary retail, and pockets of manufacturing verticals. In the very near term, furloughs are likely to weigh on growth for the sector in Q3FY23. Overall, we expect US dollar revenue growth to slow down from 12.7 per cent in FY23 to 8 per cent in FY24 for our coverage universe," it said.

Nirmal Bang added that it is not sure whether the IT industry will have great visibility about spending in 2023 as it expects budgeting to be delayed and/or short-term oriented (quarter by quarter), with the possibility of divergence between spending vs budget if economic conditions and P&L/balance sheet conditions deteriorate. 

"Going into 2023, we have been surprised by the resilience of the US consumer and believe that our explicit recession call is likely to be a mid 2023 or a H22023 event instead of a H12023 event that we were initially anticipating. We continue to advocate an 'UNDERWEIGHT' stance on the IT sector and use the recent rally to cut positions if one is overweight. We continue to prefer Tier-1 to Tier-2," Nirmal Bang said.

At 10:11 AM, shares of the information technology giant were at the day's low. In comparison, the benchmark Nifty50 index was up 0.02 per cent, while the Nifty IT index was down 1.3 per cent. Shares of the company have surged 4.5 per cent in the past one month, and 16 per cent in three months. The Nifty50 index, meanwhile, added 2.4 per cent and 4.5 per cent during the period. 

All constituents of the Nifty IT index were in the red today with Persistent Systems, Tech M, Infosys, and Mphasis falling over 1 per cent.