MUMBAI
: HCL Technologies Ltd shares hit a new 52-week high $1,882.75 on Tuesday in response to decent September quarter (Q2FY25) earnings. Sequential revenue in constant currency (CC) grew 1.6% above the Street estimate of 0.6%.
Additionally, HCL raised the lower end of FY25 revenue growth guidance to 3.5% from 3% previously. Its CC revenue growth forecast for FY25 is now between 3.5% and 5% YoY. Earnings before interest and tax (Ebit) margin of 18.6% increased 150 basis points sequentially, beating consensus expectations of 18%.
HCL maintained FY25 margin guidance at 18-19%, which takes into account the impact of salary increases.
Turbulence ahead
The profit increase was largely due to the products and platforms business, which grew 1.4% sequentially in a seasonally weak quarter. Here, revenue growth was helped by higher sales of perpetual licenses that could normalize in Q3FY25, according to Kotak Institutional Equities report on October 14. Perpetual licensing is when a software provider charges a one-time fee for selling a license to the user.
The total contract value of new deals secured by HCL increased 13% sequentially to $2.2 billion in Q2FY25, but declined year-on-year due to the Verizon deal in the base year. Revenue visibility driven by mega deals is currently weak for FY26 and requires wins in H2FY25, Kotak added.
The December quarter is seasonally weak for the sector due to ERTE. But customer-specific challenges in manufacturing (automotive and aerospace) could offset some positives for HCL, such as strong third-quarter seasonality for its software division and benefits from the recently completed Zeenea acquisition, according to the report. HDFC Securities on October 15.
Valuation concerns
Importantly, the stock’s strong rally of 25% in 2024, ahead of Nifty IT returns, means valuations are now expensive. In FY26 P/E ratio, HCL stock is trading at a multiple of 26 times, as shown. Bloomberg data. Valuations are now almost on par with those of giants Tata Consultancy Services Ltd and Infosys Ltd. In the past, HCL has traded at a discount to these competitors. In fact, HCL is now trading at a 5% discount to Nifty IT, down from a 20% discount historically, according to HDFC Securities.
As of now, there is not much room for significant rerating, especially considering that the sector is still grappling with depressed demand. HCL management is seeing green shoots of improvement in discretionary IT spending but remains cautious on the global macroeconomic environment and geopolitical tensions. Therefore, it is not extrapolating incremental demand strength beyond the December quarter and expects furloughs to be similar to last year.
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