HCL Technologies Q4 results preview: Seasonal weakness will reflect in modest 1.5-2.5% sequential constant-currency (c/c) revenue growth of Tier-1 ITs. We expect a slightly soft but steady 10-11% growth for Indian IT in FY2017. We expect March quarter results and management commentary to lend comfort on Street’s expectations, which in our view are already moderated, realistic and achievable. We believe 1-2% lower growth in FY2017e is captured in the new valuation band—Indian IT stocks are down to 14-18X from 15-20X. The new valuation band implies that stocks are building 10-13% growth as against 11-15% earlier, for a period of 4-7 years. We note that there is potential for growth to pick up from current levels as Indian IT’s participation in digital increases.
We expect HCLT to report 2.5% growth in c/c and 2% growth. Growth would be driven by IMS and engineering services. HCLT’s Ebit margin in the December quarter was impacted by 60 bps due to one-time cost associated with Chennai floods and investments in tools, software and assets. We expect Ebit margin to improve by 65 bps. Investor focus would be on (i) FY2017 demand outlook (HCL Tech to shift to March-ending fiscal year from June) (ii) growth prospects and investments in service lines other than IMS and ERD (iii) focus areas in digital and how the company intends to catch up with competition and (iv) profitability trends after the disappointment in FY2016. We have a REDUCE rating with TP of Rs 850.