Shares of HCL Technologies stood under pressure after the March 2016 quarter results driven almost entirely by concerns on EBIT margin. The share price of the company slid 6.19 per cent to Rs 750.40 on June 4 from 799.95 on April 28. According to Prabhudas Lilladher, management withdrew the margin guidance, indicated further investments in business (further margin headwinds) and didn’t quantify the margin impact/outlook of recent acquisitions (Volvo and Geometric).
Margin guidance was withdrawn at a time when some of the companies had disappointed on the margin front in Q4FY16 and HCLT had additional headwinds compared to the peer group.
According to the brokerage house, one big concern of investors has been that HCL Technologies is the only company among the top‐5 IT companies to have substantially higher margins than FY10‐12 average. While the margins for the peer group have reverted to FY10‐12 average, HCLT FY16 EBIT margins are around 450bps higher
In case the margins were to revert to previous average, there could be meaningful downside (17‐25%) to the stock, according to Prabhudas Lilladher.
HCL Technologies has subsequently provided clarity on the EBIT margin outlook and expects to maintain margins of the organic business at around 20.5‐21 per cent.
Prabhudas Lilladher believes in a bear case scenario, the stock could bottom out in the range of Rs 640‐700 (7‐15 per cent downside from CMP) and can head towards Rs 890 in base case and Rs1,020 in bull case.
The brokerage house believes that the stock is likely to bottom out over the next two quarters with the bottoming of margin expectations. “Investors will wait for 1‐2 quarters of performance and steady commentary from the management to get confident about the margin trajectory. We maintain “Accumulate” with a target price of Rs 890 (was Rs 930) based on 15x Jun‐18 EPS,” Prabhudas Lilladher said in a research report.
HCL Technologies on Friday announced that it has signed a strategic IT partnership contract with LeasePlan, a global fleet management and driver mobility company of Dutch origin. Under the terms of agreement, HCL will create Group Competency in collaboration with LeasePlan Information Services to provide IT solutions in various domains such as core leasing platforms, business intelligence and data warehousing solutions, enterprise IT solutions, and application development & maintenance services. After the announcement, the
On Friday, the scrip was trading 0.08 per cent up at Rs 751 in the late afternoon trade on BSE.