HCL Technologies Limited's (NSE:HCLTECH) Popularity With Investors Is Under Threat From Overpricing

With a median price-to-earnings (or "P/E") ratio of close to 31x in India, you could be forgiven for feeling indifferent about HCL Technologies Limited's (NSE:HCLTECH) P/E ratio of 28.3x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

With earnings growth that's inferior to most other companies of late, HCL Technologies has been relatively sluggish. One possibility is that the P/E is moderate because investors think this lacklustre earnings performance will turn around. If not, then existing shareholders may be a little nervous about the viability of the share price.

See our latest analysis for HCL Technologies

If you'd like to see what analysts are forecasting going forward, you should check out our free report on HCL Technologies.

Does Growth Match The P/E?

In order to justify its P/E ratio, HCL Technologies would need to produce growth that's similar to the market.

Retrospectively, the last year delivered a decent 6.8% gain to the company's bottom line. This was backed up an excellent period prior to see EPS up by 36% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 9.5% per annum over the next three years. With the market predicted to deliver 20% growth per year, the company is positioned for a weaker earnings result.

With this information, we find it interesting that HCL Technologies is trading at a fairly similar P/E to the market. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.

The Bottom Line On HCL Technologies' P/E

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of HCL Technologies' analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

We don't want to rain on the parade too much, but we did also find 2 warning signs for HCL Technologies that you need to be mindful of.

If these risks are making you reconsider your opinion on HCL Technologies, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.