Shares of HCL Technologies hit a 52-week low at 927.10 rupees, down almost 2% on BSE in Tuesday’s intraday trading, falling 6% in two trading sessions, ahead of results April to June quarter (Q1FY23) due later today.
Over the past three months, HCL Technologies has underperformed the market, falling 18% against a 7.5% decline in the S&P BSE Sensex. In addition, in six months, the stock fell 31% against an 11% drop in the benchmark.
Analysts expect HCL Technologies to post a subdued performance in a seasonally weak quarter. Earnings before interest and tax (Ebit) margins for the quarter are expected to contract by approximately 100 basis points sequentially due to higher retention costs as well as higher travel costs.
“We expect the Products & Platforms (P&P) business to register a single-digit decline while the IT and ER&D services to see modest growth of 2-2.5% QoQ CC. % QoQ growth in In terms of rupees, the company is expected to record QoQ revenue growth of 3.7%,” ICICI Securities said in its earnings overview.
Brokerage expects QoQ margins to contract due to higher wages and continued rationalization of labor costs amid high attrition despite the industry continuing to add new records.
Attrition in companies would continue to be high and therefore the cost of bridging attrition (at higher costs) and the costs of retention, bonuses and compensation rationalization are expected to exert pressure on the margins. Margins this quarter would also be affected due to higher travel costs as the economy opens up and visa-related costs, ICICI Securities said.
At the same time, with valuations correcting significantly over the past six months, Motilal Oswal Financial Services maintains a positive stance on the IT services sector due to a favorable medium to long-term demand outlook. The brokerage expects the near-term pressure on valuations to continue as worsening macroeconomic commentary is expected to ripple through deal flow and industry revenue over the coming quarters, leading to moderation comments from companies. Any sizeable correction should be used to increase the allocation to the sector, in our view, he said.
HCL Technologies is one of the primary beneficiaries of large-scale cloud adoption, given its expertise in IMS. “The company’s CC growth in Q1FY23E will be good due to transaction conversion in IT services and P&P seasonality. The Core Services business will experience some moderation in growth, but is expected to generate QoQ CC growth of 2.5%,” the brokerage said in the earnings overview. The services margin will remain stable compared to Q4FY22 levels, but overall profitability will remain below expectations. The outlook for services and P&P business in FY23 will be key things to watch, he said.
Pivot: Rs 942
Support: Rs 900, Rs 885
Resistance: Rs 975, Rs 1,025
The stock has been on a downtrend since mid-March and has lost nearly 23% over that time. Currently, the stock is trading a little below its lower end of the Bollinger Band on the daily chart placed around Rs 942.
The short-term bias is likely to favor the bears as long as the stock holds below Rs 942, beyond which the stock may slide towards the Rs 900 mark. super trend on the monthly chart.
(Inputs by Rex Cano)