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HCL Tech Q4 preview: Margins to remain muted; revenue growth guidance eyed

HCL Technologies is slated to announce its March quarter results for the financial year 2018-19 (FY19) on Thursday. While the company is expected to report steady numbers on the back of large deal wins, digital revenue growth and cross-currency tailwind, EBIT (earnings before interest and tax) margins are expected to be subdued owing to rupee appreciation, onsite talent crunch and employee reskilling. 

The results will be keenly watched as the US-headquartered IT services company Cognizant, earlier this week, halved its revenue forecast for 2019, citing sluggish demand in its financial and healthcare businesses.

For Q4FY19, HCL Tech is expected to post 2.9 per cent increase on quarter-on-quarter (QoQ) basis in revenue at Rs 16,152.7 crore while on year-on-year (YoY) basis, the number is likely to rise by 22.6 per cent, say analysts at Nirmal Bang Securities. In constant currency (CC) terms, the revenue is seen rising 4 per cent QoQ. 

The Noida-based company should give out 12 per cent - 14 per cent revenue growth guidance with a little more than half coming from organic growth and the remaining coming entirely from the IP (intellectual property) deal that it has signed with IBM, the brokerage says. 

In December 2018, HCL Technologies announced it will acquire select IBM software products for $1.8 billion (approximately Rs 127 billion) in an all-cash deal.

EBIDTA (earnings before interest, depreciation, tax and amortisation) is likely to come in at Rs 3,704.4 crore, up 1.6 per cent QoQ and 22 per cent YoY while net profit or PAT (profit after tax) is seen at Rs 2,578.7 crore, up 15.8 per cent YoY and down 1.2 per cent, sequentially, according to ICICI Securities.

Centrum Broking Wealth expects HCL Tech's revenue growth in CC terms to grow by 2.6 per cent. "After three consecutive quarters of depreciation, the rupee has appreciated modestly against the US dollar and acts as a modest headwind. Hence, we expect margins to drop on a sequential basis," the brokerage says. It expects EBITDA margin to come in at 22.7 per cent, down 43.4 basis points (bps) QoQ and 34 bps YoY. 

Over the last year, shares of HCL Tech have outperformed the benchmark S&P BSE Sensex by surging 23 per cent between May 8 2018 - May 2019. In comparison, the S&P BSE Sensex has gained around 7 per cent while the S&P BSE IT index has rallied over 19 per cent during the same period. 

Key monitorables for the quarter under review include demand outlook for offshore business, growth in top-10 clients, onshore business strategy, ramp-up at the North Carolina center and deal pipeline.

Analysts at Nirmal Bang Securities say that with a large acquisition of select IBM products slated for mid-2019, the company is not expected to go for any further IP related purchases in the near future. Progress in IMS (infrastructure management services) business and BFSI (Banking, financial services, and insurance) space will also be keenly watched.

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