Two Opposite Poles: Unlike Infosys, HCL Tech Stock Is Top Bull, Rises 3%, Gains Over Rs 11,000 Cr M-Cap; Why?

A north and south performance was witnessed in two tech giants Infosys and HCL Tech. While markets bleed thanks to the worries of discretionary spending outlook in the IT sector, Infosys shares toppled to become the bear. But this is about HCL Technologies, the third largest company in India, which is defying market bears and trading as a top gainer on Sensex. HCL Tech shares have risen more than 3% and gained over Rs 11,000 crore of market value. Considering, that the whole of the IT sector is likely to see gloomier days ahead, HCL Tech on the other hand received a sweeter treatment.

HCL Tech's share price jumped by 3.42% in the early trade on BSE by hitting an intraday high of Rs 1,266 apiece. This would be a surge of Rs 11,360.08 crore in market value to Rs 3,43,526.26 crore. This is opposite to Infosys which is a top bear with shares diving by over 4% along with the erosion of over Rs 26,000 crore of market cap, and not just that, this tech player's ADRs have dropped over 6.5%.

Although HCL Tech shares have corrected since its opening bell, they continue to be the top bull of Sensex with an upside of 1.9% to trade at Rs 1246.65 apiece, at the time of writing. The company still has gained a significant market cap.

In the previous session, HCL Tech's share price stood at Rs 1224.05 apiece with a market value of Rs 3,32,166.18 crore.

Both Infosys and HCL Tech posted Q2 results on October 13th which was in line with estimates, and both trimmed their FY24 guidance. But HCL Tech's growth outlook looks promising, it even recorded growth in the financial services segment. The Shiv Nadar-backed company's constant currency revenue growth was far better than peers like Infosys and TCS in Q2FY24. Also, the Noida-headquartered company's headcount drop was substantially lower than compared to its rivals. Net income and EBIT margins were also steady.

During the September 2023 quarter, HCL Tech posted net income of Rs 3,832 crore, up by 8.4% QoQ and 9.8% YoY, while EBIT stood at Rs 4,934 crore, rising by 10.6% sequentially and 11.5% YoY. Revenue in rupee terms gained by 1.4% QoQ and 8% YoY, while constant currency revenue growth stood at 1% QoQ and 3.4% YoY. HCL Tech's dollar revenue stood at $3,225 million, up 0.8% QoQ and 4.6% YoY.

Explaining the performance of HCL Tech's Q2, Dhruv Mudaraddi, Research Analyst, StoxBox said, HCL Tech Ltd.'s Q2FY24 performance is marked by steady growth, with a 3.4% YoY and 1.0% QoQ revenue increase in constant currency. The company has demonstrated impressive operational efficiency, evidenced by a substantial 154 bps sequential improvement in EBIT margin accompanied by robust cash generation.

On industry-wise performance, Mudaraddi said, the Financial Services, Life Sciences & Healthcare, and Retail verticals have demonstrated robust growth, while Manufacturing, Technology & Services, and Telecommunication sectors encountered performance challenges.

Notably, the achievement of securing a new all-time high in bookings totalling $3.9 billion, including a standout mega deal with Verizon, reflects HCL Tech's exceptional market responsiveness.

For FY24, HCL Tech expects organic revenue growth between 4% to 5% in constant currency. While services organic revenue growth is factored in the range of 4.5% to 5.5%. Including the ASAP acquisition, HCL Tech's overall revenue growth is seen ranging between 5% to 6%. EBIT margin is expected to be between 18% to 19%.

Looking ahead, Mudaraddi said, the company's growth outlook appears promising, underpinned by its commitment to innovation and expansion into high-growth segments, notably Engineering and R&D services (up 5% QoQ). HCL Tech's strategic partnerships and its proactive expansion into new markets are poised to drive future growth. Furthermore, its focus on streamlining operations and cost-reduction strategies bodes well for healthy margins. The management commentary on the margin profile of the Verizon deal, the ramp-up of mega wins, recovery in demand for discretionary services and demand trends around ERD space would be closely watched for further cues.

However, on the HCL Tech's valuation, experts are of two opinions.

In the review report for HCL Tech, Choice Equity Broking analyst Vatsal Vinchhi said, "All-time high bookings driven by a standout mega deal underscores the ability to seize exceptional opportunities in this uncertain macro
environment. Management expects H2 to be better than H1 and has guided for 5-6% YoY cc growth for FY24E. HCL continues to focus on improving its ROIC. We have introduced FY26E and expect Revenue/EBIT/PAT to grow at a CAGR of 9.4%/11.7%/11.8% respectively over FY23-FY26E. We upgrade our rating to ADD with a revised target price of Rs 1,300 implying a PE of 17x (unchanged) on FY26E EPS of Rs 76.5."

But brokerage Nirmal Bang in its review report said, " We have tweaked EPS for FY24-FY26 down a bit based on 1HFY24 performance. We maintain our valuation based on September 2025 EPS while keeping our Target PE multiple constant at 15x, leading to a Target Price (TP) of Rs1,029."

Disclaimer:

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