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Strong Q3 performance; guidance tad lower than expectations

* HCLT delivered strong 3.5% QoQ CC revenue growth, beating our expectations, led by robust 8.3% growth in the products and platform business. EBITM expanded by 130bps sequentially to 22.9%, driven by revenue acceleration and offshore shift.

* HCLT signed 13 new transformational deals (>USD25mn TCV) in Q3 across verticals, including Life Sciences & Healthcare, Technology and Financial Services. Deal bookings grew 13% YoY. The deal pipeline remains robust at closer to an all-time high.

* The company expects revenue growth of 2-3% QoQ CC in Q4 (organic growth 1-2%). Q4 guidance is tad lower than expectations (compared to 0.5%-2.5% from Infosys and 1.5%- 3.5% from Wipro). It expects EBITM to be in the range of 21%-21.5% for FY21.

* We raise our FY21/22/23E EPS by 8.4%/4.5%/4.1% on solid Q3 performance, better margins and uptick in demand environment. We maintain Buy with a revised TP of Rs1,130 (earlier Rs 1,090) based on 20x FY23E EPS.

What we liked? EBIT margin expansion, solid performance of products and platform business and healthy cash generation.

What we did not like? Lower-than-expected Q4 guidance, muted growth in BFSI

Strong revenue performance led by Mode 2 and Mode 3: HCLT delivered 3.5% QoQ CC revenue growth, above its guidance of 1.5-2.5%, on the back of strong demand in Mode 2 and Mode 3 offerings. Mode 2 revenue grew 10.9% QoQ CC, led by traction in cloud native and digital programs. Mode 3 clocked 7.1% QoQ CC on the back of strong new license sales and robust renewals. Within verticals, Telecommunication & Media (12.1% QoQ CC), Technology Services (6.8% QoQ CC) and Manufacturing (5.6% QoQ CC) led growth in Q3. BFSI reported muted performance. Some of BFSI clients purchase product licenses from HCLT; however, fulfilment happens through partners and thus, such revenues are booked under Technology & Services. Management indicated that adjusted for such accounting, underlying momentum in BFSI remains healthy and revenue grew 2%-2.5% QoQ. The Products and Platforms business reported healthy 9.3% YoY growth in Q3. Management remains confident on business growth prospects but sound caution on extrapolating such trends in future. Cash generation remained robust in Q3 with ~93% OCF/EBITDA.

EBITM expands 130bps sequentially: HCLT’s Q3FY21 EBITM expanded by 130bps QoQ to 22.9% despite a wage hike (-50bps). Revenue acceleration and SG&A leverage (+80bps), offshore shift (+50bps), catch up revenues in Mode 2 and ER&D (+40bps), and cost optimization measures helped in negating the impact of salary hikes. The company expects 80-90bps impact from the salary hike (for Level E4 and above) in Q4. HCLT has upped its FY21 EBITM guidance to 21%-21.5% (earlier 20-21%), implying a ~200bps margin decline in Q4 to achieve the upper end of guidance

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