 "Brokerages bullish on HCL Tech post Q2FY25 outperformance, raise EPS target")
Shares of HCLTech, India’s third-largest IT services company, rallied to a fresh lifetime high of Rs 1,882 in intraday trade on Tuesday following a better than expected performance in Q2FY25. The stock ended slightly lower at Rs 1,870, up nearly 0.8 per cent on the BSE.
Brokerages said the Noida-headquartered company beat street estimates, reporting stellar financials with revenue growing 1.6 per cent in constant currency (CC) quarter-on-quarter (Q-o-Q). There was broad-based growth across service lines driven by IT Services (1.8 per cent CC Q-o-Q) followed by Product and Platforms (1.4 per cent CC Q-o-Q) and ER&D (1.1 per cent CC Q-o-Q).
All verticals excluding BFSI and Telecom saw over 3 per cent Q-o-Q growth, said analysts at Nuvama Institutional Equities.
The BFSI segment managed to remain flat Q-o-Q despite headwinds from the planned State Street divestment in the UK.
The management, however highlighted headwinds in the automotive and aerospace clients, which was partially offset by strong ramp-up in the SAP business.
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New deal wins were recorded at $2.22 billion up 13 per cent Q-o-Q but down 44 per cent year-on-year (Y-o-Y). The company headcount reduced by 780 employees and attrition was recorded at 12.9 per cent versus 12.8 per cent Q-o-Q.
The management also highlighted wage hike impact of 65–80 basis points (bps) in Q3 and 50–60 bps in Q4. On the upside, HCLTech upgraded the lower end of its FY25 revenue growth guidance to 3.5–5 per cent from 3–5 per cent Y-o-Y earlier. It also maintained its FY25 margin guidance of 18–19 per cent.
During the quarter under review, earnings before interest and tax (Ebit) margin improved by 150 bps to 18.6 per cent.
Analysts at HDFC Securities
factor in the Ebit margin at 18.6 per cent for FY25 and expect it to improve to 19.3 per cent and 19.5 per cent in FY26 and 27, respectively, translating into earnings per share growth of 12 per cent over FY 24-27.
“We are tweaking earning per share (EPS) by over 1 per cent. We now value HCLTech at 28 times its Sep-26 earnings and price to earnings (earlier 27 times) on better-than-expected performance; maintain ‘buy’ with a revised target price of Rs 2,125 (earlier Rs 2,020),” Vibhor Singhal, Nikhil Choudhary, and Yukti Khemani of Nuvama wrote in a result review note.
Analysts at Emkay also tweaked their FY25-27 EPS target by 0.9-1.3 per cent factoring in the Q2 beat. However, analysts at the brokerage were cautious given the management’s stance on the acceleration in demand given false signals experienced in the past, macro uncertainties, and geopolitical concerns.
“After the strong rally and outperformance over the Nifty IT index, we expect the stock to consolidate. We increase target multiple to 26 times (earlier 25 times) on strong execution and retain ‘add’ rating with target price of Rs 1,950 at 26 times September-26 EPS,” Dipeshkumar Mehta, senior research analyst at Emkay Global Financial Services said.
Those at HDFC Securities, also maintained an ‘add’ rating on the stock with a target of Rs 1,900.
Global brokerages gave mixed calls on HCLTech, with Jefferies maintaining its ‘hold’ call with a target price of Rs 1,770.
The brokerage highlighted that while outperformance in Q2 is noteworthy, the stock has limited opportunity to rerate, given the current valuation. On the other hand, Japanese brokerage Nomura reiterated its ‘buy’ call with a target of Rs 2,000, pinning hopes on the company’s GenAI business that will drive demand in legacy tech modernisation, data and cognitive infrastructure, it said. In Q2 FY25, HCLTech reported a net profit of Rs 4,235 crore, reflecting a 10.5 per cent year-on-year growth, though remaining flat compared to the previous quarter.
Revenue for the quarter stood at Rs 28,862 crore, up 8.2 per cent year-on-year and 2.9 per cent sequentially. This performance surpassed Bloomberg’s consensus estimates, which had projected revenue at Rs 28,637 crore and net profit at Rs 4,061.6 crore.