Revenue, Margins to Improve; Attrition, FY23 Guidance in Focus

HCL Tech Q2 Results Preview:  IT major HCL Technologies is expected to report healthy revenue in the July-September quarter (Q2FY23) due to lower operating costs, subcontracting expenses, and better pricing, according to analysts. However, higher attrition will remain a dampener and limit the expansion in margin.

Investors will look out for an update on FY23 growth guidance, outlook on E&RD, and products business (P&P), deal pipeline, attrition, levers to defend margins, and progress on onboarding 10,000 freshers announced in the earlier quarter.

The company’s earnings before interest and taxes (EBIT) margin is likely to expand 30-100 basis points sequentially from 17 per cent. In the preceding two quarters, the company’s operating margin has contracted by 200 bps.

Despite such a steep erosion in the margin, HCL Technologies post the June quarter earnings had said that it will be able to achieve at least the lower end of its guided margin range of 18-20 per cent for 2022-23 (April-March).

Global brokerage firm Jefferies is estimating a 20-basis-point inorganic contribution from Confinale and Quest Informatics acquisitions, both announced in May.

The company had recorded a consolidated net profit of Rs 3,263 crore during the corresponding period last year when its consolidated revenues stood at Rs 20,655 crore. HCL Tech had registered a PAT of Rs 3,281 crore during April to June 2022 period on a revenue of Rs 23,464 crore.

The brokerage expects the company to report a quarterly (QoQ) revenue growth of 3 per cent in constant currency (CC) terms to be led by a 3.2 per cent QoQ CC growth in the services segment, and a relatively lower 1 per cent growth in the products segment on seasonal weakness.

In it’s note, Kotak Institutional Equities said: “Headwinds from wage revisions and attrition backfill costs will be more than offset by an increase in utilization rates, pyramid and pricing improvement.”

The Street is also expecting HCL Tech to maintain its FY23 guidance of 12-14 percent constant currency revenue growth and EBIT margin of 18-20 percent. The total contract value (TCV) of net new deal wins in the quarter is expected to come in at $2 billion.

Kotak sees TCV from net new deal wins at over $2 billion. Net profit growth will be negligible YoY due to the normalization of tax rates to 24.5 per cent from a low of 20.5 per cent in the September quarter last year.

Investors will be keenly monitoring management commentary on demand outlook in face of macro headwinds.

“HCL Tech is dependent on large deals for growth. So, we will be watching out for deal activity in the market. Trends in the ER&D business is also important to track as the segment is discretionary-heavy and prone to cuts in a slowdown,” Kotak Institutional Equities said in the report.

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