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Result Synopsis HCL Technologies (HCLT) reported muted performance that was below expectation. Both, revenue growth and EBIT margin were below estimates; The Services segment (90% of revenue) was down 1.0% QoQ in cc terms. The Software segment was also down 3.1% QoQ in cc terms. The revenue growth was led by strong performance in BFSI vertical (up 5.1% QoQ in cc terms). There was sequential decline in EBIT margin (down 122 bps QoQ) led by decline in revenue and increase in SG&A. Employee attrition continues to moderate as LTM attrition was down 320 bps QoQ to 16.3%.

We believe that the long-term demand story remains intact led by IT transformation and cost optimization projects. However, the macroeconomic factors in the US and Europe remain concerning and that is reflected in clients being more watchful of the situation and consequently, that continues to impact near term revenue performance. The decline in employee attrition and improving employee pyramid should support margin in FY24. We estimate revenue CAGR of 10.4% over FY23?25E with average EBIT margin of 19.1%. We maintain our ADD rating on the stock with revised target price of Rs 1,228/share at 17.5x on FY25E EPS. The stock trades at PER of 18.3x/15.8x on FY24E/FY25E EPS.

Result Highlights

* Reported revenue of Rs 262.9bn (down 1.2% QoQ in INR terms, down 1.1% QoQ in USD terms). HCL software segment (10.4% of revenue) decreased by 0.1% YoY in cc terms, while Product and IT services (90.1% of revenue) increased by 7.1% YoY in cc terms. The revenue declined by 1.3% QoQ in cc terms. BFSI vertical reported highest sequential growth at 5.1% QoQ in cc terms.

* EBIT margin decreased by 122 bps QoQ to 17.0% led by increase in SG&A Expenses.

* It reported new deal wins TCV of $1.6bn (vs $2.1bn in Q4FY23).

* Headcount decreased by 2,506 employees QoQ to close at 223,438 employees. LTM attrition decreased by 320 bps QoQ to 16.3%.

* Services Revenue Growth guidance for FY24 between 6.5%-8.5% YoY in cc terms.

* Revenue growth guidance for FY24 between 6.0%-8.0% YoY in cc terms, while EBIT margin guided to be in the range of 18.0%-19.0%.

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