The street is dumping HCL Tech shares because its employees are leaving at a faster rate than ever before

• Shares plunged nearly 7% as the shrinking margin disappointed investors.
• Revenue for the Noida-based IT services firm grew a strong 7% after adjusting foreign exchange fluctuations. This is better than that of TCS and Wipro.
• The reason for the street’s disappointment was the operating profit margin at 19% which didn’t grow at all despite the strong growth in revenue.
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HCL Technologies clocked a 7% growth in revenue (after adjusting for foreign exchange changes) between October and December 2021. Now, that’s better than TCS and Wipro and it should have been a reason for the stock market to cheer.

However, the stock slipped nearly 7% when the market opened for trade on Monday (Jan 17).
The reason for the street’s disappointment was the operating profit margin of 19% which didn’t grow at all, compared to three months earlier, while the revenue grew sharply. Salary hikes and cost of hiring and retaining employees are eating into the profit, according to analysts at Sharekhan, a Mumbai-based broking firm.

So much so that the company has cut its operating margin (earnings before interest and taxes) guidance for the full year ending March 2022 to 19% from the earlier estimate of 19-21%.

The reason is the sharp jump in attrition, which has more than doubled since the end of March 2021.
While the costs are rising, the business is growing too. The management at HCL Tech expects a double digit growth i.e anything above 10%, for the full year ending March 2022. That’s quite encouraging.
The question is whether this will result in higher profits as well. Analysts at Motilal Oswal believe that all the growth on the topline will trickle down to profit next year onwards. In a report dated Jan 17, Motilal Oswal has increased the earnings estimate for the year ending March 2023 by 2%.

Here are target prices set by several brokerage firms for the company’s share price.

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