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Mode-2, 3 driven momentum

We maintain BUY on HCL Tech (HCLT), based on solid 3Q and a strong outlook across multiple growth vectors. Large deal momentum (>13% YoY and 13 transformational deals >USD25mn TCV in 3Q) and pipeline at nearly an all-time high (many USD 200-300mn deals) supports the growth outlook. Operational highlights include offshore-led improvement in ER&D and IT & Business services margins and continuity in strong cash generation with OCF/EBIT at 114% (119% in 2Q). P&P business traction (>14,000 customers 6,000 sales transactions across new and renewals) is expected to continue (beyond 4Q weak seasonality), supported by new product releases (15+ in 3Q), strong deal activity (USD 91mn net new license bookings) and more crosssell/up-sell transactions across products/services. The absence of large acquisitions and subsequent accretion to FCF/payout are upside risks to valuations. Our target price is Rs 1,110 at 18x Dec-22E (15% EPS CAGR over FY21-23E).

* 3QFY21 highlights: (1) HCLT’s revenue came in marginal above our estimates at 4.4% QoQ (3.5% QoQ CC), supported by +2.7% QoQ CC in IT & BS, +2.5% QoQ in ER&D and +8.3% QoQ in P&P segment. (2) EBIT margin was 22 quarter high at 22.9% (+127bps QoQ) supported by SG&A leverage (+50bps), Offshoring (+50bps), revenue catch up in Mode 2 & Mode 3 (+80bps), offset by wage hike (-50bps). (3) Growth was broad-based across the verticals with TME/Tech/Mfg/Retail delivering 12.1/6.8/5.6/3.7% QoQ respectively (CC terms). (4) 4QFY21 margins to be impacted by wage hike impact (-80 to -90 bps). (5) Revenue guidance revised at +2% to +3% QoQ (CC terms) for 4QFY21E while EBIT margin guidance revised upward to 21- 21.5% for FY21E.

* Outlook: We have factored in USD revenue growth at +2.4/13.1/10.5%, factoring in IT & BS growth at +0.6/13.7/10.4%, ER&D growth at -4.2/+11.8/+12.6% and P&P growth at +23.1/11.7/8.6% over FY21/22/23E respectively. EBIT margins are estimated at 21.6/21.7/21.9% over the same period, translating into an EPS CAGR of 15% over FY21-23E (TCS/INFY at 19/20% CAGR).

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