Q1 results impact: TCS up 2%, HCL Tech slips; Brokerages remain optimistic

TCS's management maintained that near term demand challenges remain and refrained from giving recovery timelines, implying a slow and gradual recovery ahead.

Shares of Tata Consultancy Services (TCS) gained 2 per cent to Rs 3,326 on the BSE in Thursday’s intra-day trade after India’s largest information technology (IT) services company on Wednesday reported 16.8 per cent year-on-year (YoY) growth in its consolidated net profit at Rs 11,074 crore in the April-June quarter (Q1FY24). It was 2.7 per cent lower than the Rs 11,392 crore reported in the previous quarter, mainly on account of uncertain macros, slow growth in the company’s majority markets, and delays in project execution.

TCS, on expected lines, reported muted revenues performance with Revenues at $ 7.23 billion, up 0.4 per cent quarter-on-quarter (QoQ) on reported basis and flattish QoQ (up 7 per cent YoY) on constant currency (CC) basis. The earnings before interest tax (EBIT) margins at 23.2 per cent, was down ~130 bps QoQ, owing to 200 bps impact of wage hike partly offset by efficiency benefits.
 

Among the positives, was a healthy orderbook at $ 10.2 billion (excluding BSNL order), up 24 per cent YoY and ~2 per cent QoQ driven by marquee deals bagged in Q1. However, the management maintained that near term demand challenges remain and refrained from giving recovery timelines, implying a slow and gradual recovery ahead, ICICI Securities said in a note.

Given its size, order book and exposure to long-duration orders and portfolio, TCS is well positioned to withstand the weakening macro environment and ride on the anticipated industry growth. Owing to its steadfast market leadership position and best-in-class execution, the company has been able to maintain its industry-leading margin and demonstrate superior return ratios, Motilal Oswal Financial Services (MOFSL) said. The brokerage firm maintains ‘Buy’ rating on the stock with a target price of Rs 3,790.

Meanwhile, shares of HCL Technologies dipped 2 per cent to Rs 1,087.75 on the BSE in intra-day trade today after the Noida-based firm reported a weak set of numbers with revenues at $ 3.2 billion, down 1.3 per cent QoQ (up 6.3 per cent YoY) on CC basis. The decline was led by ER&D business down 5.3 per cent QoQ, while IT and Business services were muted at 0.1 per cent QoQ.

The company posted a net profit of Rs 3,534 crore for Q1FY24, up 7.6 per cent YoY but down 11.3 per cent QoQ, slightly below consensus Bloomberg estimate of Rs 3,843 crore.  

EBIT margins declined to 16.9 per cent vs. 18.25 per cent QoQ on lower utlisations, given the demand challenges in tech, media and publication segments.

The order booking at $1.6 billion was down 24.5 per cent QoQ. The company, however, maintained its revenue guidance of 6-8 per cent for FY24 in CC terms and operating margins of 18-19 per cent, which implies heavy lifting and asking rate amid demand challenges ahead. ICICI Securities believes quick conversion and turnaround of new orders will be key to meet guidance, which looks challenging currently.

Higher exposure to Cloud, which comprises a larger share of non-discretionary spending, offers better resilience to its portfolio in the current context, with higher demand for Cloud, Network, Security, and Digital workplace services. Given its capabilities in the IMS and Digital space, along with strategic partnerships and investments in Cloud, MOFSL expects HCL Technologies to emerge stronger on the back of healthy demand for these services in the medium term.