On Monday, CLSA downgraded shares of HCL Technologies (HCLT:IN) from 'Outperform' to 'Hold,' with a slight adjustment in the price target to INR 1,556 from the previous INR 1,558. The firm cited the impact of offshoring a significant contract in the Banking, Financial Services, and Insurance (BFSI) sector and the annual tradition of passing productivity benefits to major clients in the first quarter as reasons for the downgrade.
HCL Technologies reported its first-quarter financial year 2025 (1QFY25) revenue at $3,364 million, marking a 5.6% year-over-year increase but a 1.9% decline quarter-over-quarter in constant currency terms. The decrease in sequential revenue was attributed mainly to the aforementioned offshoring and productivity benefits.
The company's Ebit margin stood at 17.1%, which aligned with consensus estimates and exceeded CLSA's forecast. Despite this, the management's outlook on demand and the guidance for the fiscal year 2025, projecting revenue growth of 3-5% year-over-year in constant currency and an Ebit margin of 18%-19%, remained unchanged.
CLSA's decision to downgrade HCL Technologies also reflects its valuation, which is at a 24x PE ratio and currently stands at only a 13% discount to Tata Consultancy Services (NS:TCS), the smallest discount to TCS in six years. CLSA believes that the strong quarters typically expected for HCL are already priced into its valuation, prompting the slight revision in the price target and the rating change.
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