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All-round beat

HCLT delivered better-than-expected operating performance in Q2. The demand environment continues to be healthy and fairly broad-based. Management remains confident about the near-to-medium term growth outlook on the back of strong deal intake and deal pipeline. HCLT has increased its revenue growth guidance to 13.5- 14.5% CC (earlier, 12-14%) for FY23, implying 2.6-3.8% CQGR in H2, on the back of continued traction in the services business, product business seasonality, healthy deal intake (USD2.38bn in Q2FY23) and strong momentum in Cloud, Digital & Engineering services. Management has revised EBITM guidance to 18-19% for FY23 (earlier, 18- 20%), and the strong recovery in Q2 grants it confidence on delivering within the guided range. We raise our earnings by 0.9% to 2.5% for FY23E-25E, factoring-in the Q2 performance. We maintain BUY, with a TP of Rs1,070/share at 17x Sep-24E EPS (earlier, Rs1,060), considering reasonable valuations and the >4% dividend yield.

Results summary: Revenue grew 1.9% QoQ to USD3.08bn (3.8%/15.8% QoQ/YoY CC), above our estimates, on back of continued strength in the Services business (5.3% QoQ CC). EBITM expanded ~90bps QoQ to 17.9%, clocking 60bps above our expectations. Services business EBITM expanded ~130bps QoQ to 17.6%, bolstered by currency movement (+60bps), SG&A leverage (+45bps), and uptick in realization & increased utilization (+115bps), partly negated by wage hikes (-90bps). Net profit stood at Rs34.9bn, higher than our estimate, due to better than expected operating performance. HCLT signed 8 large services deals and 3 product deals with a total new deal TCV of USD2.38bn in Q2. Revenue growth was broad-based and led by Manufacturing (10.9% CC QoQ), Public Services (6%), and Life Sciences (5.1%). P&P declined 7.8% CC QoQ. The company has increased its revenue growth guidance to 13.5-14.5% CC for FY23, implying 2.6-3.8% CQGR in H2. It has guided to 16-17% growth in Services revenue for FY23, indicating a 1.8%-2.9% CQGR in H2. It has revised EBITM guidance to 18-19% for FY23. What we liked: Broad-based growth, upward revision in revenue growth guidance, healthy deal intake (ACV up, by 10.3% QoQ and 23.5% YoY), strong margin recovery, and healthy cash conversion (OCF/EBITDA at 74% vs 34%/71% QoQ/YoY). What we did not like: Weakness in P&P performance.

Earnings-call KTAs: 1) The growth momentum in services was led by digital engineering and digital application services, with cloud adoption being a horizontal theme across all services and verticals. 2) Higher billing rates/better realization, pyramid optimization, higher utilization, growth-led operating leverage, and rupee depreciation remain key margin levers. 3) Deals signed January onward are based on the revised rate cards. Management further indicated that negotiations are ongoing in existing deals and new deals are being signed with COLA clauses. 4) Management expects the P&P business to remain flattish for FY23. 5) The company hired 10k freshers in Q2 and plans to add ~30k freshers in FY23. 6) Mode 2 continues to lead the growth momentum, growing at 30.9% CC YoY in Q2. 7) The company announced an interim dividend of Rs10 per share. 8) Key changes in top management: Rahul Singh (currently, President - BFSI) has been appointed as COO for the corporate function, and Srinivasan Sheshadri will replace him as Head - BFSI. VV Apparao (current CHRO) will now be moving to a new role, as the Chief Delivery Officer - nearshore and Ramachandran Sundarajan has been appointed as the Chief People Officer. 9) Deal wins in Q2 included a mega deal with 5-year tenure. This deal will contribute minimal revenue in FY23, and is likely to contribute an average ACV of USD125mn per year from FY24.

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