HCL Technologies Limited's (NSE:HCLTECH) Low P/E No Reason For Excitement

HCL Technologies Limited's (NSE:HCLTECH) price-to-earnings (or "P/E") ratio of 29.2x might make it look like a buy right now compared to the market in India, where around half of the companies have P/E ratios above 35x and even P/E's above 66x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's inferior to most other companies of late, HCL Technologies has been relatively sluggish. The P/E is probably low because investors think this lacklustre earnings performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

See our latest analysis for HCL Technologies

Keen to find out how analysts think HCL Technologies' future stacks up against the industry? In that case, our free report is a great place to start.

Is There Any Growth For HCL Technologies?

The only time you'd be truly comfortable seeing a P/E as low as HCL Technologies' is when the company's growth is on track to lag the market.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 6.4% last year. The solid recent performance means it was also able to grow EPS by 26% in total over the last three years. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 8.9% each year over the next three years. Meanwhile, the rest of the market is forecast to expand by 21% each year, which is noticeably more attractive.

In light of this, it's understandable that HCL Technologies' P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Bottom Line On HCL Technologies' P/E

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of HCL Technologies' analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

And what about other risks? Every company has them, and we've spotted 2 warning signs for HCL Technologies you should know about.

If you're unsure about the strength of HCL Technologies' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.