First quarter results from HCL and TCS show disturbing similarities

HCL Technologies Ltd. is the second IT company to report its June quarter results after hours on Tuesday. But there is hardly good news for IT investors who were already disappointed with Tata Consultancy Services Ltd (TCS) Q1FY23 earnings announced last week.

In fact, there are disturbing similarities between the two.

First, HCL’s Ebit margin at 17% declined 100 basis points (bps) sequentially, and was at a multi-quarter low. Furthermore, it was lower than the consensus estimate of 17.6%. Ebit is short for Earnings Before Interest and Taxes. One basis point equals 0.01%.

TCS also missed consensus margin estimates. At 23.1%, TCS’ Ebit margin hit a multi-year low.

Second, attrition has increased further. HCL IT services attrition in the last twelve months increased to 23.8%, up 190 basis points quarter-on-quarter. Company management expects attrition to begin to decline starting in the third quarter.

For TCS, LTM base churn increased to 19.7% from 17.4% in Q4FY22.

Rising outsourcing costs, increased attrition and the return of travel costs were factors that hurt Ebit margins for HCL and TCS. HCL management expects margins to improve from current levels. For FY23, HCL expects margins to be at the lower end of its 18-20% guided band.

Additionally, HCL and TCS hired fewer employees in the June quarter compared to past quarters.

HCL saw the net addition of 2,089 employees during the quarter. Prabhudas Lilladher analysts note that this figure is well below the average addition of about 9,600 employees per quarter in FY22.

TCS hired 14,136 net employees in Q1FY23. That compares to the previous six-quarter average of about 23,000, analysts at Nirmal Bang Institutional Equities said.

Similar to TCS, HCL management is also optimistic about near-term demand and sees no slowdown in demand. HCL maintained its guidance for FY23 of constant currency revenue growth of 12-14%.

Even so, HCL stock slipped to a fresh 52-week low of 905 on the NSE, reacting to his gains. This is not surprising given that fears of revenue being hit by the recession are already haunting the minds of IT investors. The sector has already seen downward earnings revisions for FY23. These can get steeper if margins don’t see the expected recovery or if customer spending declines in coming quarters.

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