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Good 3Q performance, valuation attractive

Defensive portfolio to drive outperformance

* HCLT delivered a strong revenue growth of 5% QoQ CC in 3QFY23 (in line), led by seasonal gains in HCL Software (P&P), which was up 30.5% QoQ in CC terms. IT Services grew by 2.2% in CC terms with a robust new deal TCV of USD2.3b (flat QoQ/+10% YoY). The company maintained its FY23 USD revenue growth guidance of 13.5-14.0% in CC.

* Further, it delivered a strong beat in EBIT margin at 19.6% (+165bp QoQ, 110bp above our estimate), led by HCL Software, which was up 12.3pp. Services margin was largely flat QoQ (in line). HCLT narrowed its EBIT margin guidance to lower side at 18-18.5% from 18-19%.

* Despite seasonality and a tough demand environment, HCLT maintained its growth momentum in both IT Services and ER&D verticals. HCL Software delivered strong growth, ahead of expectations on seasonality. The deal wins remained strong (book to bill of 0.7x). While there is visible weakness in macro, especially in Europe, increased vendor consolidation deals, a strong pipeline of cost-take out deals, and favorable pricing should help HCLT tackle any softness in discretionary spending and weak macro.

* Strong revenue growth guidance of 16-16.5% YoY in CC terms for the services should address investor concerns on the company’s growth.

* HCLT’s margin improvement over 2QFY23 and 3QFY23 despite wage hikes has been reassuring, and the company should continue to improve margins in FY24 as well. We expect HCLT to deliver FY23 margin near the mid-point of its guidance, and further improve to 18.7% in FY24.

* The strong growth guidance and margin performance in an environment, where demand for IT services is expected to be incrementally weaker, should boost investor confidence on HCLT’s business and lower the valuation gap with larger Tier-1 peers. We continue to see HCLT’s defensive business as positive in a demand-constrained environment.

* On a combined basis, HCLT is expected to deliver USD revenue growth of 11% and a corresponding PAT CAGR of 13.2% over FY22-25E. HCLT is currently trading at an inexpensive 15x FY24E EPS.

* We have largely maintained our estimates. We reiterate our Buy rating with a TP of INR1,270 (20x FY24E EPS).

In-line revenue but big margin beat in Q3, guidance maintained

* Revenue grew by 5% QoQ CC (in line). Q3 new deal TCV stood at USD2.3bn (flat QoQ/+10% YoY). ACV was up 2% YoY.

* For 9MFY23, HCLT delivered USD Revenue/INR EBIT/INR PAT growth of 10%/13%/10% YoY.

* Revenue growth guidance has been retained at 13.5-14.0% YoY CC. IT Services is expected to grow by 16-16.5% YoY in CC terms.

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