Global brokerage firm CLSA has given an outperform rating to HCL Technologies stock with a target price of Rs 1,000 per share. Although the order book for the IT company looks healthy in North America, the brokerage firm believes that uncertainties from European clients can affect HCL Tech’s business for the financial year 2023.

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At 9:56 am, shares of HCL Technologies were trading at Rs 916, down by 0.2 percent from the previous close on the BSE. The stock has fallen after two days of consecutive gain after the company announced it was selected as the digital transformation partner of the NY Giants, New York Jets and MetLife Stadium in America's New Jersey, one of the hosts of FIFA World Cup matches in 2026. In the year so far, shares of HCL Tech have fallen over 30 percent.

According to CLSA, HCL Tech’s operating or earnings before interest and taxes (EBIT) margin — the financial ratio that measures the profitability of a company — is estimated to be at the lower end of its guided 18-20 percent band in FY23. A lower operating margin indicates lower profitability from a company.

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Domestic brokerage firm Edelweiss has a buy rating on the shares of HCL Tech with a target price of Rs 1,710. “The tide is turning in HCLT’s favour, evident in organic revenue growth of 12.4 percent in FY22 versus 10.2 percent organic revenue CAGR during FY17-20. ACV for FY22 grew 21 percent YoY, superior to revenue growth of 12.8 percent and bodes well for growth,” said Edelweiss in a note.

How business in Europe impacts Indian IT companies?

HCL is India's third-largest information technology company in terms of revenue after Tata Consultancy Services (TCS) and Infosys. For the April-June quarter, HCL Tech saw a 22.5 percent growth in revenue from Europe as compared to the corresponding period a year ago.

Due to spiralling fuel prices, inflation in Europe reached 9.1 percent in August, forcing many small businesses to suspend operations. The British pound also fell to an all-time low against the US dollar on Monday. Apart from this, the ongoing energy crisis has added to concerns that investors could cut exposure to shares of companies in the IT industry in India.

Also read: TCS remains watchful as IT sector stares at slowing demand in Europe

The Indian IT companies if we talk about Europe contribute roughly 25-30 percent of the total revenue with the majority coming in from America and the rest of the world. The general management commentary is that the cost optimization and digital transformation on account of affordability which their client’s management was focusing on will lead to more outsourcing work to India," said Raj Vyas, Portfolio Manager, Teji Mandi.

Earlier in July, Rajesh Gopinath, CEO of Tata Consultancy Services, said that some clients, particularly in Europe, have expressed concerns about the macroeconomic fallout of the ongoing conflict there. But the predominant sense is that technology spending will be resilient. That said, given the macro level uncertainties, we remain very watchful”

CLSA, in its note, also said that fears of a deep recession in Europe and the concern are it will impact growth for Indian IT in Europe.

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First Published:Sept 28, 2022 11:09 AM IST