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Strong performance led by Services segment; expected slowdown in near term growth

Result Synopsis

HCL Technologies(HCLT) reported strong sequential performance. While, the revenue growth was inline, there was beat on operating margin. The Services segment(90% of revenue) continues to maintain growth momentum as it grew by 5.3% QoQ in cc terms. The Platform and Product segment had weak quarter due to seasonality factors(down 7.8% QoQ in cc terms). The revenue growth was led by strong performance in Manufacturing vertical(up 10.9% QoQ). There was sequential improvement in EBIT margin(up 92bps QoQ) led by improving employee pyramid and other efficiency measures, despite the impact of wage hike in the quarter. Employee attrition remains high as LTM attrition was flat QoQ at 23.8%.

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, we expect moderation in growth in near term. It is well on track to meet its targeted 18-19% EBIT margin band for FY23. We estimate revenue CAGR of 14.2% over FY22?24E with average EBIT margin of 18.6%. We change our rating on the stock from BUY to ADD with revised target price of Rs 1,081/share at 17.5x on FY24E EPS. We have slightly reduced our target multiple from 18x to 17.5x to account for risks from evolving macroeconomic situation. The stock trades at PER of 18.1x/15.4x on FY23E/FY24E EPS

Result Highlights

* Reported revenue of Rs 246.9bn( up 5.2% QoQ in INR terms, up 1.9% QoQ in USD terms). The growth was led by IT services segment( 90% of revenue) that grew 5.3% QoQ in cc terms; while Product and Platform( 9.8% of revenue) declined by 7.8% QoQ in cc terms. The revenue growth was 3.8% QoQ in cc terms. Manufacturing reported highest sequential growth at 10.9% QoQ in cc terms.

* EBIT margin improved by 92 bps QoQ to 17.9% led by improving employee pyramid and other productivity measures.

* Deal bookings remained strong as it reported new deal wins TCV of $2.4bn ( up 16% QoQ, up 6% YoY). Headcount grew by 8,359 employees QoQ to close at 219,325 employees. LTM attrition remained flat QoQ at 23.8%

* Declared dividend of Rs 10 per share with payment date as Nov 02.

* It has slightly increased revenue growth guidance for FY23 to 13.5%-14.5% from 12%-14% in cc terms; while narrowed down its EBIT margin guidance to 18%-19% from 18-20% earlier guidance.

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