HCL Tech Q1 Preview: Weak deals, client spending to dent profits by 5-7%

HCL Tech is set to report its financial performance for the April-June quarter of fiscal year 2024-25 on Friday, July 12. The Indian information technology (IT) major is expected to face decline in topline due to annual productivity benefits to clients on renewals and offshoring of a large contract, brokerages said. 

According to analysts, HCL Tech is likely to report a revenue increase of 6-7 per cent year-on-year (Y-o-Y) between Rs 27,900 crore to Rs 28,034 crore. However, sequentially revenues could dip by 1-2 per cent. The company registered revenues of Rs 26,296 crore in Q1FY24 and Rs 28,499 crore in the March quarter of FY24. 

 

Further, the IT major may report a net profit in the range of Rs 3,714 crore to Rs 3,770 crore for the June quarter of FY25, against Rs 3,534 crore in Q1FY24. Brokerage firms expect an increase of 5-7 per cent in net profits Y-o-Y for Q1FY25. 

Though on a quarterly basis, profits could slide by 5-7 per cent. The company reported a profit after tax (PAT) of Rs 3,986 in the March quarter of FY24. 

Key monitorables: The street will watch out for the reasons for weak deal wins (adjusted for Verizon contract) over the past four quarters and its implications for revenues, and revenue growth outlook for the next quarter. Further management’s commentary on recovery in discretionary spending in the services segment and environment required to hit the aspirational margin band of 19-20 per cent will be a crucial watch for investors. 

Moreover, here’s what key brokerages expect from HCL Tech’s Q1 results:

Nomura: The global brokerage estimates a 2 per cent constant currency (cc) decline in revenues Q-o-Q due to annual productivity benefits to clients on renewals and offshoring of a large contract. It expects the impact of state street BPO business divestment to hit in second quarter and retained its FY25F revenue growth guidance of 3-5 per cent in cc.

Further, the brokerage said that HLC Tech will face a 60 basis points (bps) margin contraction Q-o-Q driven by impact from annual productivity benefit to clients partly offset by offshoring tailwind.

Management’s commentary on cost takeout projects, banking vertical and outlook on client discretionary spend are key issues to watch out for, according to Nomura. 

Kotak Institutional Equities: Analysts at KIE also predict a 2 per cent revenue decline due to impact of usual productivity gains in annuity deals and additional impact of offshoring of a large deal that ramped up from March 2023. 

They forecast a decline of 2.3 per cent Q-o-Q in IT and business services, and 2.7 per cent in products. The decline in revenues is seto have an impact on earnings before interest and tax EBIT margins. 

With the brokerage estimating 70 bps Q-o-Q and 10 bps Y-o-Y decline in EBIT margin. 

“HCLT has disappointed so far in net new deal wins in FY2024, except for the $2.1 billion mega deal with Verizon. This will be an area of investor focus. We forecast deal wins of $2.5 billion. Expect the company to retain 3-5 per cent revenue growth and 18-19 per cent Ebit margin guidance for FY2025E,” Kawaljeet Saluja, Sathishkumar S, and Vamshi Krishna of KIE wrote in a report. 

Nuvama Research: Those at Nuvama Research anticipate HCL Technologies to maintain FY25 revenue growth of 3–5 per cent in cc terms Y-o-Y and margin guidance of 18-19 per cent.

However, they too, bake in a revenue decline of 2.1 per cent Q-o-Q in cc terms in Q1FY25 and 2.4 per cent Q-o-Q in dollar terms  mainly due to offshoring impact in a large project. 

According to the brokerage the Ebit margins will fall by 80 bps Q-o-Q due to revenue headwind and seasonality. 

Motilal Oswal: Despite the near term headwinds for IT majors, Analysts at Motilal Oswal picked HCL Tech as their preferred pick among Tier-I players. As HCL Tech is one of the key beneficiaries of having a defensive business mix, which should support its growth in the current environment, they said. 

However, they too, expect a 2 per cent Q-o-Q decline in revenues in cc terms. 

ICICI Securities: The brokerage is eyeing management’s commentary on updates on Verizon deal, FY25 revenue growth and margin guidance, fillip to products and platform business from AI being embedded into them and enterprise discretionary spending.

Like the rest, ICICI Securities also baked in a muted quarter for HCLT on lack of any major deal announcements. They expect a 1.9 per cent cc Q-o-Q revenue contraction and Ebit margin to be down by 60 bps Q-o-Q due to higher visa costs.