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Strong seasonality in Software segment drove financial performance

Result Synopsis

HCL Technologies (HCLT) reported strong sequential performance. Both, revenue and operating margin were above estimates. The Services segment (88% of revenue) grew by 2.2% QoQ in cc terms. The Software segment had strong quarter due to seasonality factors (grew 30.5% QoQ in cc terms). The revenue growth was led by strong performance in Life Science and Healthcare vertical (up 5.5% QoQ in cc terms). There was sequential improvement in EBIT margin (up 165bps QoQ) led by improving employee pyramid and strong performance in high margin Software segment. Employee attrition has started moderating as LTM attrition was down 210 bps QoQ to 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 18-18.5% EBIT margin guidance for FY23. We estimate revenue CAGR of 16.2% over FY22?24E with average EBIT margin of 18.7%. We maintain our ADD rating on the stock with revised target price of Rs 1,181/share at 18.5x on FY24E EPS. The stock trades at PER of 19.6x/16.8x on FY23E/FY24E EPS.

Result Highlights

* Reported revenue of Rs 267.0bn (up 8.2% QoQ in INR terms, up 5.3% QoQ in USD terms). The growth was led by HCL software segment (12.3% of revenue) that grew 30.5% QoQ in cc terms, while ER&D and IT services (88.2% of revenue) increased by 2.2% QoQ in cc terms. The revenue growth was 5.0% QoQ in cc terms. Lifesciences & Healthcare reported highest sequential growth at 5.5% QoQ in cc terms.

* EBIT margin improved by 165 bps QoQ to 19.6% led by improving employee pyramid and freshers becoming billable.

* Deal bookings remained flattish as it reported new deal wins TCV of $2.3bn (up 10% YoY). Headcount grew by 2,945 employees QoQ to close at 222,270 employees. LTM attrition decreased by 210 bps to 23.8% QoQ.

* Declared dividend of Rs 10 per share with payment date as Feb 01.

* Revenue growth guidance for FY23 expected between 13.5%-14.0% in cc terms, while narrowed down its EBIT margin guidance to 18.0%-18.5%.

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