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HCL Technologies reported results in-line with estimates. Overall revenue growth was 3.8% q-o-q/+15.8% y-o-y in constant currency. The Services segment showed strong growth at 5.3%q-o-q/18.9% y-o-y in CC, compensating for the seasonally weak quarter in the products & platforms business (-7.8% q-o-q/-7.2% y-oy). EBIT margins improved by 90 bps q-o-q to 17.9% as the company benefited from strong realization and operating leverage. HCL Tech raised revenue guidance for FY23 to 13.5-14.5% y-o-y in constant currency and revised EBIT margin guidance to 18-19%. We expect HCL Tech’s revenue/EBITDA/PAT to grow at 12%/12%/12% between FY22-25E. We value HCL Tech at 16x H1FY25 EPS to arrive at a target price of 1,075 representing a 14% upside and re-initiate coverage with an ADD rating Revenues in-line with estimates, HCL Tech raises revenue guidance to 13.5%-14.5% CC Revenue was Rs246,860 mn (+5.2% q-o-q, +19.5% y-o-y) and in-line with consensus estimates. USD Revenue was $3,082 mn (+1.9% q-o-q, +10.4% y-o-y). Constant currency growth was +3.8% q-o-q, +15.8% y-o-y also in-line with estimates. Growth was strong in the IT & business services segments (+5.3% q-o-q in CC), and the ER&D services business (+5.0% q-o-q in CC) while the products and platforms business had a seasonally weak quarter (-7.8% q-o-q). TCV bookings (new deal wins) were at $2,384 mn (+16% q-o-q, +6% y-o-y) indicating continuing strong demand. HCL Tech raised its revenue guidance for the year to 13.5%-14.5% y-o-y in CC (previous guidance: 12-14%). In addition, the company also provided a Services revenue guidance of 16%–17% YoY in CC indicating robust demand for FY23. However, the company is flagging some uncertainty in macroeconomic conditions and some sectors are seeing ramping down of projects. As a result it expects some slow-down in H2FY23 driven by macroeconomic slow down as well as seasonal factors.

EBIT margin of 17.9% was above estimates, FY23 margin guidance revised to 18-19% EBIT margin was 17.9% (+93 bps q-o-q) slightly above estimates of 17.7%, while PAT margins were 14.1% (+13 bps q-o-q) in line with estimates. EBIT Margin improved for HCL Tech despite salary hikes coming in this quarter. The EBIT margin in the services business improved to 17.6% (+134 bps q-o-q) from which 115 bps came from better utilization/pricing, 45 bps came from SG&A expenses, 55bps from forex gains which was offset by 90 bps impact from wage hikes. EBIT margins for the products and platforms business declined 224 bps due to seasonality. The improvement in pricing came partly due to renegotiations and also due to price increases that the company took for projects after Jan 2022 which are now accounting for a greater share of revenues. EBIT margin guidance was revised to 18%-19% (previous guidance: 18-20%), We expect HCL Tech to further improve margins in Q3/Q4FY23 as reducing attrition and pricing increase taken earlier in the year start having a greater impact on margins.

Valuation:

HCL Tech currently trades at 14x H1FY25 EPS which is a 33% discount to TCS HCL Tech’s stock currently trades at a modest valuation of 14x H1FY25 EPS, which is a 33% discount to market leader TCS. We believe HCL Tech’s improving execution on margins, strong dividend yield and steady revenue growth would enable it to close the gap between itself and the market leader. We value HCL Tech at 16x H1FY25 EPS and arrive at a target price of Rs1,075 which is a 14% upside to the current price and re- initiate coverage with an ADD rating.

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