Company's revenue growth is likely to be volatile going ahead
The move to reserve $ 20 million revenue is due to differences with one specific client but HCL may also see 80 basis points cross-currency revenue hit in the said quarter. These will in turn impact earnings. Analysts now expect the company's dollar revenues as well as net profit (in Re terms) to grow 1 per cent each on a sequential basis in the September quarter as compared to a little over 3 per cent projected prior to the news.
While these issues seem to be more of a one-off, HCL's revenue growth is likely to be volatile going ahead. This is because management is witnessing elongation in revenue recognition in its infrastructure management services (IMS) business due to complex projects. Notably, IMS forms about 35 per cent of its consolidated revenues. Increasing competitive intensity in this segment is another factor leading to slower revenue growth in the IMS segment, believe analysts.
The silver lining though comes from the possibility of large deal wins and market share gains in the IMS business in the medium-term. This is a key reason behind analysts' continued optimism on HCL Tech even though most of them have trimmed their full year estimates to factor in the one-offs in September quarter.
"Though we are not concerned about the currency impact, we are keen to gain more clarity on the client specific issue and complexities in IMS business issues. We will wait for Q1FY16 numbers to alter our estimates. Maintain 'BUY' with Rs 1,030 target price," said Edelweiss analysts.
Sandeep Muthangi, IT analyst at IIFL sounds more positive. "We continue to be positive on HCL Technologies due to its high exposure to fast growing infrastructure services, improving traction in engineering services and cheaper valuations". He believes that the sharp fall in the stock price offers a good buying opportunity.
Of the six analysts polled by Bloomberg on October 1 (post HCL's warning), three each have a Buy and Hold recommendation. Their average target price of Rs 996 implies upside potential of 16 per cent from current levels.
The stock currently trades at 13.8 times FY17 revised earnings estimates, slightly higher than its historical one-year forward price/earnings of 12 times. Its closest peer, Wipro on the other hand, trades at 14.5 times FY17 estimated earnings.
While HCL's past track record provides confidence and valuations appear inexpensive on a relative basis, the key lies in management commentary on demand trends, deals and outlook for IMS segment. Street will be watching out for these comments to assess the severity of the IMS revenue slowdown as indicated by the management. Those with some appetite for risk could buy on declines.