HCL Tech shares jump 4% as Q3 earnings beat Street estimates. Should you buy?

Shares of HCL Technologies climbed nearly 4% to hit a day’s high of ₹1,619.60 on the NSE after the brokerages remained upbeat on the IT consulting company following its third quarter results wherein it reported strong all-round quarter with revenues and EBIT margin well ahead of estimates.

However, it seems that investors were not convinced about the numbers despite it seemingly appearing to be a pretty big beat. Global brokerage CLSA has downgraded the HCL Tech stock to ‘Underperform’ from ‘Outperform’, despite raising the target to ₹1,536 per share. It said the average stock return over the past five years has been flat.

CLSA said that bunching up of multiple catalysts led to a strong beat but they see weak sequential growth in the next quarter and the quarter followed.

Ambit said that qualitatively the numbers are better than peers but valuations of HCL Tech keep them at bay. Valuations are at 24.9 times forward multiple, and 84% premium to pre-Covid three-year average.

Though Ambit has a ‘Sell’ call on HCL Tech with a target price of ₹1,360, the brokerage prefers the company over Infosys and TCS. HCL Tech will likely outperform peers on cloud demand and ER&D recovery, but absolute growth largely at pre-Covid levels, it said.

Analysts at Morgan Stanley maintains an ‘Equal weight’ rating on the stock but raised their target price to ₹1,600 per share from ₹1,470, highlighting the company’s superior third quarter performance and notable beats in services business and EBIT margins.

HCL Tech reported better-than-expected earnings for the quarter ended December, on the back of strong growth in the services and software business. Its consolidated net profit rose 13.5% sequentially to Rs 4,350 crore in the December quarter, and revenue grew nearly 7% to Rs 28,446 crore.

In constant currency terms, HCL Tech’s revenue grew 6% sequentially in the quarter.

Narrowed FY24 revenue guidance

Despite good numbers in the third quarter, HCL Tech has trimmed its guidance for the current financial year.

The company’s management has narrowed the FY24 revenue guidance to 5%–5.5% year-on-year in constant currency from 5%-6% and maintained the margin guidance of 18%–19%. The management expects a solid fourth quarter and continued momentum in FY25.

HCL Tech’s performance in the third quarter was decent and guidance largely intact, which should make it the fastest-growing largecap in FY24, according to Nuvama Institutional Equities. Its decent growth in services and lower exposure to the troubled BFSI (23%) segment imply high probability of stable earnings growth, it said.

“A high dividend yield and inexpensive valuation provide a floor to the stock price. We see Q3FY24 to be the bottom for the earnings downgrade cycle for HCL and the sector,” the brokerage said while maintaining a ‘Buy’ on the stock and a target of ₹1,780 from ₹1,700 earlier.