HCL Tech Soars: Brokers Upgrade Earnings After Strong Q2!

HCL Tech, HCL (Photo: Reuters)

In a notable development, HCL Technologies has achieved a new record with its shares reaching an all-time high of Rs 1,882, climbing 1.40 percent during the BSE trading on Tuesday. This surge comes after the company delivered impressive financial results for the second quarter of the fiscal year 2024-25 (Q2FY25).

Market analysts are thrilled, as HCL Tech surpassed expectations by showing robust financial growth. The company’s revenue experienced a quarter-on-quarter increase of 1.6 percent in constant currency, primarily driven by gains in IT Services, Product and Platforms, and Engineering Research & Development (ER&D), which grew by 1.8 percent, 1.4 percent, and 1.1 percent respectively.

Despite some challenges, nearly all sectors except for Banking, Financial Services, and Insurance (BFSI) and Telecom reported over 3 percent growth on a quarter-on-quarter basis, according to analysts at Nuvama Institutional Equities. The BFSI sector remained flat due to the anticipated divestment of State Street in the UK.

The management pointed out difficulties faced in the automotive and aerospace sectors, but noted that these were somewhat balanced out by a significant uptick in their SAP business. The company recorded new deal wins totaling Rs 2.22 billion, marking a 13 percent increase quarter-on-quarter but a notable 44 percent decline year-on-year. Additionally, they reported a decrease in workforce by 780 employees, while attrition increased slightly to 12.9 percent from the previous quarter’s 12.8 percent.

Looking ahead, the management pointed out that the impact of wage hikes is expected to be around 65–80 basis points in Q3 and 50–60 basis points in Q4.

Strong Revenue Growth Forecasted

In good news for investors, HCL Tech has upgraded the lower end of its revenue growth forecast for fiscal year 2025, now expected to grow by 3.5 percent to 5 percent instead of the previous 3 to 5 percent year-on-year. They’ve consistently maintained their margin guidance for FY25 in the range of 18 to 19 percent. During this quarter, their earnings before interest and tax (Ebit) margin saw an increase of 150 basis points, reaching 18.6 percent.

Analysts Adjust Expectations

Analysts from HDFC Securities have revised their expectations for HCL Tech’s Ebit margin for FY25, projecting it at 18.6 percent and predicting an increase to 19.3 percent in FY26 and 19.5 percent in FY27. This translates to an expected compound annual growth rate (CAGR) of 12 percent for earnings per share (EPS) from FY24 to FY27.

Vibhor Singhal, Nikhil Choudhary, and Yukti Khemani from Nuvama noted in their review, “We have adjusted the earning per share (EPS) forecast upwards by over 1 percent. We now value HCL Tech at 28 times its earnings for September 2026, an increase from a previous multiplier of 27 times, and we are maintaining a ‘Buy’ rating with a revised target price of Rs 2,125, up from Rs 2,020.”

Meanwhile, analysts at Emkay have made slight adjustments to their EPS target for FY25-27, ranging from 0.9 to 1.3 percent higher due to the Q2 results. However, they caution about the management’s inability to confirm a demand acceleration, due to previous false signals, macroeconomic uncertainties, and geopolitical issues.

“After a significant rally and outperformance against the Nifty IT index, we anticipate the stock will stabilize. We’ve increased our target earnings multiple to 26 times, up from 25 times, based on strong operational results, and we maintain an ‘Add’ rating with a target price of Rs 1,950,” stated Dipeshkumar Mehta, a senior research analyst at Emkay Global Financial Services.

HDFC Securities has also retained an ‘Add’ rating on the stock, targeting Rs 1,900, reflecting confidence in the company’s continued performance.

Globally, brokerages are divided on their outlook for HCL Tech. Jeffries has chosen to stick with a ‘Hold’ recommendation, setting a target price of Rs 1,770. They highlighted that, while the impressive Q2 performance is noteworthy, the stock might have limited potential for reevaluation due to its current valuation.

On a brighter note, Japanese brokerage Nomura has reiterated its ‘Buy’ recommendation, projecting a price target of Rs 2,000, fueled by optimism regarding HCL Tech’s GenAI division, which is expected to enhance demand for modernizing legacy technologies, data, and cognitive infrastructure.

Q2 Financial Highlights

HCL Technologies has reported a strong performance for the second quarter of FY2024-25. The company posted a net profit of Rs 4,235 crore, indicating a year-on-year growth of 10.5 percent, although this was flat compared to the previous quarter.

The revenue for this quarter was recorded at Rs 28,862 crore, which marks an 8.2 percent increase year-on-year and a sequential rise of 2.9 percent. This strong showing exceeded the consensus estimates provided by Bloomberg, which had anticipated a revenue figure of Rs 28,637 crore and a net profit of Rs 4,061.6 crore.

This news is significant as it showcases HCL Tech’s resilience and ability to adapt to changing market conditions, providing a solid foundation for future growth.

As we continue to monitor HCL Technologies, all eyes will be on how they navigate the upcoming quarters and whether they can sustain their growth trajectory amidst market challenges.