Shares of HCL Technologies tanked over 9% on Tuesday after the company reported its results for the third quarter of FY25. While, the company’s earnings were in-line with market expectations, the marginal guidance upgrade suggested a weaker exit rate for Q4, dampening sentiment.
The third-largest IT services company in India reported a net profit of Rs 4,591 crore in the third quarter ended December 2024, reporting a growth of 8.5% from Rs 4,235 crore in the previous quarter. The IT major’s revenue in the December quarter rose 3.6% to Rs 29,890 crore from Rs 28,862 crore, quarter-on-quarter (QoQ). Revenue in US terms increased 2.6% at $3,533 million from $3,445 sequentially.
The company said the growth during the quarter is powered by broad-based performance across business linked. “Clients across verticals and reaffirmed their confidence in our digital and AI offerings. We are positioning ourselves for a future that is transformative, with AI empowering businesses and employees,” said C Vijayakumar, CEO and MD of HCL Tech.
At the time of writing, HCL shares were trading 168.05 points or 8.50% down at Rs 1,820 on the National Stock Exchange (NSE). The stock is set to record its biggest single-day decline in nearly 10 years.
The company has updated its FY25 overall and services Constant Category revenue growth guidance to 4.5-5% from 3.5-5% but retained its 18-19% EBITM guidance.
The revision was capped by a planned scale-down of a significant telecom deal in Q4 and dealys in ramping up some discretionary projects, said CEO C Vijayakumar.
Revised Guidance Stirs Caution
Despite the strong quarterly results, HCL Tech’s stock plummeted as brokerage highlighted that the revised guidance indicated slower growth for Q4, which was disappointing, particularly given the management's observation of stronger discretionary demand.
Nuvama analysts noted that Q4FY25 could be soft due to a large project nearing completion in the Retail vertical and a planned reduction in one mega deal in Telecom, likely extending into Q1. As a result, HCL Tech’s guidance implies a required QoQ growth of -1.3% to 0.6% in Q4FY25. The brokerage firm further stated that this soft exit is expected to impact FY26 growth.
Nuvama continues to like HCL’s solid growth, high FCF generation, and capital allocation. However, with the stock trading at 28.5 times FY26E PE and discretionary-focused peers such as Infosys available at a discount, they find limited upside potential. The brokerage has downgraded the stock to ‘HOLD’ primarily due to full valuations, with a fresh target price of Rs 2,150.
Sentiment on Future Growth
Analysts at Phillip Capital mentioned that overall it was a decent quarter for HCL with a beat on margins, strong ACV growth, optimistic demand commentary and narrowed guidance. They expect HCL Tech to continue to be amongst the leaders in growth, driven by a good mix of discretionary and non-discretionary services, IT & ER&D recovery, improved visibility, decent TCV, and a strong pipeline. The dividend yield of over 3% remains one of the best among peers.
However, Q4 growth may face headwinds due to a large project nearing completion in the Retail vertical and a planned reduction in one mega deal in Telecom, likely extending into Q1. The brokerage maintained a ‘BUY’ rating on the stock, with a target price of Rs 2,200 per share.
Centrum Broking also maintained an “Add” rating on the stock, increasing the target price to Rs 2,076, up from Rs 1,890 earlier. The brokerage pointed out early signs of a revival in the overall demand environment and expects gradual improvement in revenue growth, driven by ramping up recently signed deals and growing traction in AI-based solutions. The increase in the number of small-sized deals, with shorter tenures, was also highlighted.
While HCL Tech's strong Q3 results were overshadowed by market concerns, its solid pipeline, strategic investments in AI, and high dividend yield are factors that investors may find attractive in the long run. However, in the near term, brokerages are cautious due to softer growth expectations for Q4 and potential impacts on FY26 growth.
