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Q1FY24 performance: HCL Tech (HCLT) has reported Q1FY24 revenue at US$3,200mn, down -1.1% QoQ in US$ and down 1.3% QoQ in CC terms below our/consensus estimate of 0%/0.8% QoQ CC growth. Softness in revenue growth was led by decline in ER&D (16% of revenue) by 5.2% QoQ CC, in IT and business services (75% of revenue) by 0.1% QoQ CC and in software products and platforms by 3.1% QoQ CC. ER&D segment had full quarter impact of weakness in tech and telecom verticals seen in the month of Mar’23. Telecom vertical declined 14.4% QoQ and technology declined 7.8% QoQ. EBIT margin came in at 17%, 110bps QoQ below our and consensus expectations (ISEC: 18.1%, Cons: 18.1%). Services (IT+ER&D) margin declined 120bps QoQ to 16.2% due to lower utilisation, increased travel costs and last quarter had one-time benefit of 40bps. Overall PAT at Rs35,310mn was ~7% below our estimate due to miss on revenue and margins. New deal wins’ TCV was weak at US$1,565mn, down 24% YoY and 25% QoQ. The company expects deal TCV to recover in next 1-2 quarters given the strong deal pipeline (17.7% QoQ, 26.2% YoY) and several deals in advanced stages. HCLT retained its revenue guidance at 6- 8% YoY CC for overall company and 6.5-8.5% YoY CC for services business for FY24 despite muted growth in Q1FY24 because of strong deal pipeline with several deals in advanced stages and expectation of faster conversion of TCV into revenue in next 1-2 quarters.

What to do with the stock:

HCLT missed our estimates on all fronts including revenue, EBIT and EPS. It reported soft orderbook (contrary to strong growth at TCS). No guidance cut to either revenue (6- 8% YoY in CC terms for FY24) or EBIT margin (18-19%) implies potential sharp pick-up ahead in earnings growth for HCLT. Having said that, we believe given continued uncertain macro environment particularly for verticals like banking, hi-tech and telecom, it would be a good outcome even if HCLT ends up at the lower end of its guidance for FY24 at 6%. We are currently building-in 2.9%/4.1%/2.0% QoQ CC growth for HCL over Q2/Q3/Q4 FY24E and expecting FY24E CC growth at 6% YoY with EBIT margin at 18.2% (flat YoY). At this growth, HCLT would still likely be the fastest growing large cap IT services company (except LTIMindtree) this year and deserves to trade at a premium to its historical 10-yr average of 15x. Improving RoE/RoCE metrics and improved capital allocation framework with higher dividend payout policy should further warrant a premium to its historical trading range. We cut our FY24E EPS estimate by 1% given the sharp EPS miss of 7% in Q1FY24 vs ISEC estimate, but largely maintain our outer year EPS forecast. We upgrade HCLT to BUY with 12-month SoTP-based target price of Rs1,275, implying 15% potential upside. Sharp pickup in growth ahead with strong December quarter seasonality due to software licensing business makes HCLT a strong tactical and relative BUY in our coverage

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