On Monday, Investec reaffirmed its sell stance on HCL Technologies (HCLT:IN), maintaining a stock price target of INR1,300.00. The firm cited concerns over the company's ability to meet its earnings before interest and taxes (EBIT) margin guidance. The technology company's EBIT margin for the fourth quarter of the fiscal year 2024 was reported at 17.6%, which is a decrease from 18.2% at the end of the fiscal year 2023.
HCL Technologies has been advised to ensure that its EBIT margin does not drop below 17% for the first quarter of the fiscal year 2025, despite anticipating a quarter-over-quarter revenue decline of 2% for that period. This expected decline is higher than the 1.1% decrease experienced in the first quarter of the fiscal year 2024.
The previous fiscal year's first quarter benefited from higher travel costs, which improved margins by approximately 0.40% in the second quarter, a situation that is not expected to repeat.
Investec's analysis suggests that reaching the lower end of the EBIT margin guidance of 18% for the fiscal year 2025 could be challenging for HCL Technologies. Consequently, the firm has reduced its earnings estimates for HCL Technologies for the fiscal years 2025, 2026, and 2027 by 1.2%, 1.8%, and 2.5%, respectively.
The stock price target of INR1,300.00 is based on an 18 times multiple of the company's trailing twelve months (TTM) earnings per share (EPS) estimated for the first quarter of the fiscal year 2027. Investec has expressed caution regarding potential negative earnings catalysts that could arise from productivity benefits and the exit of a client during the first three quarters of the fiscal year 2025.
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