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HCL Tech to report Q3 results on Friday; here's what top brokerages expect

According to Emkay Global Financial Services, HCL Tech could revise its revenue guidance for FY21 upward to 2.5 per cent-3.5 per cent
After a stellar set of numbers by information technology (IT) majors TCS, Infosys and Wipro, all eyes are now on HCL Technologies that is slated to post its October-December 2020 quarter (Q3FY21) earnings on Friday, January 15.

Most analysts see a 5-6 per cent year-on-year (YoY) rise in Q3 revenue, led by broad-based growth across verticals and geographies, and easing of stress in the ER&D segment. Sequentially, the revenue may rise between 2 per cent and 3.5 per cent. The revenue could increase by 3 per cent quarter-on-quarter (QoQ) in constant currency (cc) terms and 2.5-4 per cent QoQ in dollar terms, believe analysts.

Outlook on ER&D business, deal total contract value (TCVs) and pipeline, recent acquisitions, margin trajectory given pricing pressure, capital allocation policies including payout ratios and M&A activities are among key monitorables. Besides, investors must also watch out for any revision in FY21 revenue and margin guidance and vertical wise commentary.

According to Emkay Global Financial Services, HCL Tech could revise its revenue guidance for FY21 upward to 2.5 per cent-3.5 per cent, factoring in DWS acquisition.

Revenue projection
Strong growth in cloud adoption, improvement in mode 2 revenues and easing of stress in ER&D segment could drive HCL Tech revenue up by 6.1 per cent YoY and 3.5 per cent QoQ to Rs 19,241.7 crore, said ICICI Direct. The firm had posted a revenue of Rs 18,135 crore in the same quarter last year and Rs 18,594 crore in the preceding quarter.

The brokerage sees revenue growth of 4 per cent QoQ in dollar terms and 3.4 per cent in cc terms.

Meanwhile, analysts at Phillip Capital expect revenue to rise 5.2 per cent YoY and 2.6 per cent QoQ to Rs 19,077.1 crore. "We expect dollar revenue growth of 3.1 per cent at $2,584 million and positive cross-currency impact of 70 bps, implying cc revenue growth of 2.4 per cent," said Phillip Capital in its earnings preview report.

On the lower end of the band, Emkay Global is pencilling in revenue growth of 4.6 per cent YoY and 2 per cent QoQ at Rs 18,970.2 crore. We are building in 2.5 per cent QOQ dollar revenue growth with 50bps cross-currency tailwinds, it said.

PAT expectations
HCL Tech's profit after tax (PAT) could rise between 2 per cent and 5.5 per cent YoY but could decline or stay flat sequentially, according to brokerages.

On the higher end, Sharekhan pegs Q3 PAT at Rs 3,205 crore, up 5.5 per cent YoY and 2 per cent QoQ. This is against a Rs 3,038 crore profit posted by the firm in Q3 of FY20 and Rs 3,142 crore in the previous quarter of same fiscal.

Meanwhile, on the lower end, ICICI Direct sees only 2 per cent rise in HCL Tech's Q3 profit to Rs 3,097.6 crore and rather expects it to decline 1.4 per cent sequentially. Brokerage Emkay Global said profit may remain flat QoQ but rise 3.5 per cent YoY.

Impact on EBIT margin
Brokerages expect earnings before interest and tax (EBIT) margin to decline in the quarter under review.

ICICI Direct said EBIT margins are expected to decline 96 bps QoQ, mainly led by partial wage hikes. However, Emkay Global sees a decline of only 30 bps as it expects operating efficiencies and cost optimization measures to offset the wage hike impact. Those at Sharekhan and Phillip Capital see a 42 bps and 60 bps contraction in Q3 EBIT margins, respectively.

HCL Tech's EBIT margins stood at 20.2 per cent in the corresponding quarter last year and at 21.6 per cent in the September quarter.

Sharekhan expects the company to maintain its margin guidance of 20 per cent-21 per cent for FY21.

At the bourses, shares of HCL Tech have risen 16.57 per cent in the three months ended December 2020 as against a 21.55 per cent rise in Nifty IT index and 24.30 per cent gains in benchmark Nifty50. Meanwhile, on a year-to-date basis, the stock is up 12 per cent till January 13, 2021.

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