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Strong revenue performance; margin disappoints

* HCLT delivered a strong revenue beat in Q3, aided by solid growth in Services and a sharp rebound in Products & Platforms (24.5% QoQ CC). Revenue grew by 7.6% QoQ in CC terms, the highest in the last 46 quarters. EBITM was flat at 19.0%, below expectations.

* It signed 8 large services and 8 product deals across financial services, technology & services, and life sciences & healthcare for a total new deal TCV of USD2.1bn (64% YoY). Strong broad-based demand and robust deal intake augur well for revenue acceleration.

* The company has reiterated double-digit revenue growth guidance in CC for FY22. It has also retained 19-21% EBITM guidance for FY22, considering supply-side challenges and planned investments in Mode 2 capabilities and markets.

* We tweak FY22-24 EPS estimates by -1% to 2.4%, factoring in Q3 revenue beat, margin miss and lower ETR. Revenue growth is encouraging; however, pressure on Services margin limits earnings upgrade. Retain Buy with a TP of Rs1,460 at 23x Dec’23E EPS.

What we liked? Strong rebound in Products and platforms, continued acceleration in ER&D revenue, healthy deal intake (New deal TCV at USD2.1bn), broad-based revenue growth.

What we did not like? Increase in attrition (19.8% on LTM basis vs 15.7% QoQ).

Strong rebound in Products & Platforms revenue sequentially; FY22 revenue growth to be in double digits: Revenue grew 6.7% QoQ to USD2.98bn (7.6% CC). In a seasonally soft quarter, Services revenue increased by 4.7% QoQ CC, beating our expectation. Products and Platforms revenue saw strong 24.5% QoQ CC growth, with HCL Commerce and HCL DX products performing well; however, Q4 is expected to be soft due to seasonality. It retained 0-1% revenue growth guidance in FY22 for Products & Platforms. Revenue growth was led by Mode 3 offerings (21.6% QoQ CC) after three quarters of sequential decline. Mode 1 and Mode 2 revenues grew 5.1% QoQ CC and 6.1% QoQ CC, respectively. The ER&D business grew 8.3% QoQ CC on traction in digital engineering and IoT works. IT and business services grew 4.7% QoQ CC, driven by acceleration in cloud transformation and application modernization deals. The company is confident of sustaining revenue growth momentum in the Services business on the back of broad-based demand and strong order bookings (USD6bn in 9MFY22). HCLT has retained its double-digit revenue growth guidance for FY22.

EBITM below expectations; FY22 EBITM expected to be closer to lower end of 19-21% guided range: Q3FY22 EBITM was broadly flat QoQ at 19% (below estimate), as a sharp uptick in Products & Platform margin negated a decline in Services margin. The Services business reported a 190bps QoQ decline due to salary hikes (-80bps), seasonal leaves (- 65bps), new customers ramp-up/knowledge transfer costs & other investments (-40bps), retention, backfilling costs, bonus & recruitment costs (-85bps), partly negated by operating leverage, SG&A (+60bps) and currency benefits (+20bps). HCLT has retained its 19-21% EBITM guidance range but indicated that FY22 margins would be closer to the lower end, factoring in 9M performance, supply-side inflation, and planned investments in leadership augmentation, certain geographies and Mode 2 capabilities.

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