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Resilient Q1; Outlook positive

HCL Technologies Limited provides software development business process outsourcing, information technology and infrastructure services. The company is spread across 49 countries with 170,000+ employees and its client base, including 250 of the fortune 500 companies

* Spiraling digital engineering demand aids revenue growth across segments with Q1FY22 registering 12.5% YoY uptick at Rs. 20,068cr (+11.7% YoY in CC terms).

* EBIT Margin contracted 109bps YoY to 19.6%, impacted by the pandemic - leave cost, COVID support cost and low revenue growth. Also, 3,500 freshers were hired during the quarter. PAT margin came in at 16.0% (flat YoY) due to favorable tax position (Rs. 10cr benefit).

* Given company’s robust pipeline, strong booking momentum, solid balance sheet along with growing clients and large deal wins, the management expects to deliver sustained long-term growth. Therefore, we reiterate our BUY rating on the stock with a revised TP of Rs. 1,147 based on 20x FY23E adj. EPS.

Broad-based growth across verticals

Revenue for Q1FY22 was up 12.5% YoY to Rs. 20,068cr (on CC basis +11.7% YoY, +0.7% QoQ). Improving digital transformation/digital engineering services yielded in robust growth in Lifesciences & Healthcare of 22.1%/5.4% YoY/QoQ in CC terms. This in-turn benefitted ERS segment with 10.7% YoY/4.3% QoQ revenue growth. BFSI and Tech Services verticals grew 8.8%/2.9% and 14.9%/1.6% YoY/QoQ in CC terms, while Telecom rose 17.0% YoY in CC terms (-1.9% QoQ) reflecting medium-term recovery. Products & Platforms business registered a growth of 6.0% YoY on CC basis (-1.0% QoQ) on large deal wins (8 services and 4 products) while maintaining healthy renewal rates. Mode-2 business continued to witness a healthy uptick of 2.3%/29.0% QoQ/YoY led by Digital and Cloud transformation momentum.

Bottom-line intact

EBIT came in at Rs. 3,934cr (+6.6% YoY) despite EBIT margin contracting 109bps YoY to 19.6% on hiring and retention costs coupled with higher R&D spends and new market investments. Net Profit (pre-minorities) was at Rs. 3,213cr vs. Rs. 2,935cr in Q1FY21 (16.0% PAT margin), up 9.9% YoY/8.5% QoQ excluding last quarter’s one-time milestone bonus. Employee attrition was at 11.8% on LTM basis (vs. 14.6% in Q1FY21).

Key concall highlights

* HCL unwinded its IP partnership with CeleritiFinTech for banking products and recovered the investments including payable of USD 25mn.

* The board declared a dividend of Rs. 6 per share in Q1FY22.

* The company won 12 large deals this quarter with a TCV of USD 1.6bn (+37.4% YoY); Majority deals in cloud and digital space.

* FY22 EBIT margin guided to be between 19% - 21%, while revenue is expected to grow in double digits in CC terms for FY22.

Valuation

Despite second wave of the pandemic, the company has shown high resilience. With continued investments in digital engineering and geography expansion, HCL is positive about scaling up its margins in the upcoming years apart from winning large deals. Considering the growth prospects, we reiterate our BUY rating on the stock with a revised price target of Rs. 1,147 based on 20x FY23E adj. EPS.

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