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Revenue growth remained muted: HCL Tech Q1FY24 revenue came in below our expectation. It posted revenue at Rs 26,296cr, down by 1.2% QoQ and up by 12.1% YoY while revenue in USD stood at 3,200mn, de-growth of 1.1% QoQ and growth of 5.8% YoY. In constant currency, revenue was down 1.3% QoQ and up by 6.3% YoY. Overall revenue was impacted due to de-growth in both service and software business. Its service business which clocks in at 90% revenue de-grew by 1% QoQ and grew by 7% YoY in CC terms while remaining 10% of business from the software segment saw a de-growth of 3.1% QoQ while flat YoY in CC terms. Amongst verticals mixed trend was seen wherein growth was led by Financials, manufacturing and retail segments which were up by 5.1%, 3.6% and 0.3% QoQ in CC terms while de-growth in Technology, life science & healthcare and media & communication impacted sentiments.

Margins below expectations: HCL Tech’s EBIT seen a de-growth of 8.2% QoQ and grew by 11.2% YoY to Rs 4,438cr while EBIT margins came in below expectations of 18-19% as it declined by 130bps QoQ and 14bps YoY to 16.9% in Q1FY24. Margins of both businesses were impacted and saw a decline of 120bps and 10bps in service and software business, respectively.

Attrition continued to moderate: The company’s attrition continued to moderate to 16.3% in Q1FY24 as compared to 19.5% in Q4FY23 and 23.8% in Q1FY23. So, attrition declined by 320bps QoQ and 750bps YoY which seems positive.

Deals: The company won new deals worth USD 1,565mn in Q1FY24, down by 24.5% QoQ and 23.8% YoY. It won 18 large deals out of which 7 were in services while 11 in the software segment. Going ahead, management is confident of winning more large deals from its software business

Status-quo on guidance: HCL Tech management continued to be cautious on the demand and macro environment so they maintained their revenue growth guidance in the range of 6-8% YoY in constant currency and service revenue growing in the range of 6.5-8.5% YoY in constant currency. For EBIT margins they expect it to be in the range of 18-19%.

Outlook & Valuation: In the near term, a challenging macro environment and delay in spending will continue to impact sentiments for the IT sector as well for HCL Tech. Further, the management plan is to grow its software business as well as focus on building on newer technologies. Also, ahead there are expectations that clients would prioritize their spending and focus more on cost optimization and vendor consolidation along with AI technologies. Thus, from a medium to long term perspective are positive and have estimated its revenue/EBIT growth in INR terms to grow at a CAGR of 12.3%/15.8% over FY23-25E. Further, HCL is trading at comfortable valuation and we have assigned a P/E of 18x FY25E EPS and have maintained a Buy rating with a target price of Rs 1,333.

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