Buy HCL Technologies Ltd For Target Rs.1,407 - Yes Securities
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Muted performance on weak seasonality of Product and Platform business
Our view and valuation
Overall, the financial performance was below expectation due to weak seasonality in Product and Platform segment. The P&P segment declined by 24% QoQ affecting the overall growth. However, the IT services segment(contributing 73% to revenue) continues to deliver among industry leading growth at 5.2% QoQ in Q4FY22. We expect revenue growth to be more predictable and robust going ahead as IT services contribution rises in revenue mix. Deal booking remains strong and that offers strong growth visibility for FY23. We expect it to maintain 18% + EBIT margin for FY23 led by improving employing pyramid and positive operating leverage. Employee attrition should come in control over next few quarters. We expect revenue CAGR of 15.4% over FY22‐24E, with average EBIT margin of 19.7%
Valuation remains attractive as it trades at PE of 16.4x on FY24E EPS. We maintain BUY Rating on the stock with revised target price of Rs 1,407/share at 21x on FY24E.
Result Highlights
* Reported revenue of Rs 226bn( up 0.5% QoQ in USD terms, up 1.2% QoQ in INR terms). The muted revenue performance was due to 24% QoQ decline in Product and Platform business( weak Q4 seasonality), which contributes 10% to revenue. IT Services segment ( 73% to revenue) posted robust growth of 5.2% QoQ.
* EBIT margin declined by 106 bps QoQ to 18%, led by higher employee cost. Management has guided that it would be able to achieve 18‐20% EBIT margin band for FY23.
* Deal wins remained strong as TCV of new deals were at $2,260 mn for the quarter, up 6% QoQ.
* Added 11,100 employees during the quarter, up 5.6% QoQ to reach 208,877 employees. LTM attrition increased by 220 bps QoQ to 21.9% in line with industry trend DSO improved by 3 days QoQ to 61 days.
* Declared final dividend of Rs 18/ share( total dividend of Rs 44/ share for FY22) Guided for 12‐14% revenue growth in cc terms for FY23 , with EBIT margin band of 18‐20%
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