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Buy HCL Technologies Ltd For Target Rs.1,333

Decent revenue growth: HCL Tech’s revenue was better than expectation, with constant currency growth of 5% QoQ driven by HCL software business (earlier known as Products & Platform) which grew in double digit of 30.5% QoQ in CC while service business just grew by 2.2% QoQ in CC. Additionally, revenue growth of 13.1% YoY in CC led by 15.4% YoY in its service business but software business remains muted. Revenue in Rupee terms came in at Rs 26,700cr, up by 8.2% QoQ and 19.6% YoY while revenue in $ term was at $3,244, up by 5.3% QoQ and 9% YoY. The growth in the quarter was led by its software business, continuous demand for cloud & digital transformation and Europe showing resilience across geographies. Going ahead service business to drive growth but software business growth may remain muted as Q4 is a seasonally weak quarter.

Europe amongst geographies and Life-science, healthcare, manufacturing and telecommunication in verticals led the growth: Amongst the geographies, Europe witnessed a robust growth in CC and grew by 23.3% YoY and 7.2% QoQ, while Americas grew by 12.3% YoY and 0.5% QoQ in CC. Amongst the verticals, in CC wall these four segments grew in double digit (rupee term) wherein Life science & healthcare grew by 12.1% QoQ, manufacturing grew by 11% QoQ and telecommunication saw a growth of 10.5% QoQ. Other sectors such as financials, retail, technology and public services grew in the range of 4.5-8.2%.

Margin improved significantly: HCL’s EBITDA improved and grew in double digit by 17.3%% QoQ and 18% YoY. Margin came in at 23.8%, improved by 186 bps QoQ and a decline of 31bps YoY. In addition, EBIT too showed strong growth and grew by 18.1% QoQ and 22.8% YoY with improvement in margins by 165bps QoQ and 52bps YoY at 19.6%. With business, software business led margin improvement of 157bps and remaining 8-10bps was from services business. Apart from this, margin seen improvement led by forex gains and better cost optimization measures and better realization (together gain of 150bps) is driving margin growth. Margins were more or less in-line with management expectation however it reiterates that margins would be at a lower band of 18-18.5% for FY23.

Abating attrition and steady deal momentum: HCL’s attrition saw a decline of 210bps is positive and it stood at 21.7% as compared to 23.8% in Q2FY23. On the deal front, the company won 17 deals out of which 10 were of software and 7 from services. Further, HCL deals were worth ~$2,347 Mn, down by 1.6% QoQ and 9.9% YoY. Going ahead, they are expecting deal momentum to continue driven by strong demand for cloud and digital transformation and vendor consolidation across verticals such as manufacturing, financial Services, Retail & Consumer products while technology verticals will be muted.

Outlook & Valuation: We remain positive on HCL Tech in medium to long term and the growth is expected to be driven by continuous demand for service business (deals in cloud and digital), strong order book across verticals (such as manufacturing, life-science and retail), and robust company’s capabilities of fulfilling the clients demand. Besides, its cost management program, focused on better utilization of employees, is aiding margin improvement. Additionally, abating attrition level is too positive. We have estimated its revenue/EBIT growth in INR terms to grow at a CAGR of 15.3%/17.2% over FY22-25E. Further on the valuation front, HCL Tech is trading at a comfortable valuation of 14x FY25E EPS as compared to large-cap peers. We continue to maintain a Buy rating with a target price of Rs 1,333.

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