HCL Tech management paints a weak outlook for FY23 revenues

On Friday, the problems began with HCL Technologies but soon it spread across to most of the IT stocks as the front liners slumped sharply in the market. HCL Tech alone fell by 5.8% on Friday while other leading IT stocks also faced a lot of pressure in the market. The pressure on the stock started after HCL Tech, in a statement, highlighted that it expected revenues in financial year 2022-23, i.e. FY23, to gravitate towards the lower end of the guidance band. Normally, each quarter, HCL Tech gives guidance on revenue growth and operating margins in a range and now it has cautioned of revenue growth pressure.

The statement was made at an investor meeting held in New York, but the impact was felt right here in Indian markets. At the meeting, the management of HCL Tech admitted that the revenue growth guidance for FY23 was most likely to show a bias towards the lower end of its 13.5% to14.5% range. Here we are looking at constant currency terms, which is the other term used for dollar revenues, after offsetting the currency impact. This is likely due to higher than expected attrition, especially in its core BFSI and hi-tech segments.

For now, the interpretations of this statement are all over the place. One view is that this cautionary story could pertain more to a couple of quarters rather than to any long term shift in outlook. Also, the view is that not all companies may be impacted by this move, but if the impact is on the BFSI side of the business, then all the large IT companies are likely to get hit as BFSI still constitutes a very sizable chunk of the IT outsourcing business. HCL Tech also mentioned that the price hikes would be more selective due to client level pressures.

At the end of the day, the technology budgets are based on the profitability of the end user companies and clients. With slowdown in demand for most products in the US, the direct impact is going to be on tech spending and on the farming of orders to Indian IT companies. The impact would not only be felt on volumes but also in the pricing power of IT companies in the short to medium term. This problem of volumes cum pricing is likely to be most pronounced across the BFSI, manufacturing and technology verticals. Indian IT has a large exposure to the interest sensitive sectors like mortgages, capital markets etc.

To cut a long story short, the consensus expectation pronounced by HCL Tech management is that the dollar revenue growth could most likely slow from 12.7% in FY23 to 8% in FY24, and that is something that spooked the markets. Most American and European balance sheets are likely to deteriorate in the coming quarters and the direct impact would be felt on companies like HCL Tech. Not surprisingly, most of the brokerages appear to be underweight on IT, especially the large IT stocks. For now, it looks like IT companies could be up against a series of headwinds. At least, volumes and pricing are going to be under pressure and HCL Tech may have just spoken on behalf of the entire IT sector.