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Solid topline growth; Demand momentum intact

HCL Technologies Ltd. provides software development business process outsourcing, information technology and infrastructure services. Company is spread across 52 countries with 197,000+ employees and its client base, including 250 of the fortune 500 companies and 650 of Global 2000.

* Consolidated revenue grew 15.7% YoY (+8.1% QoQ), fueled by strong demand momentum. This was the highest growth recorded in the last 47 quarters exceeding the management’s expectations.

* EBITDA was down by 4.1% YoY (+7.4% QoQ) mainly due to higher Employee benefit expenses (+24.9% YoY). As a result, PAT declined 13.3% YoY (+5.6% QoQ), further impacted by higher taxes.

* Company continues to pay dividend of Rs. 10/share for the quarter, totaling to Rs. 32 per share till date in FY22.

* While margins remained under pressure, we maintain a positive longterm outlook considering strong pipeline and continued demand growth momentum and hereby reiterate our BUY rating on the stock with a rolled forward TP of Rs. 1,409 based on 22x FY24E adj. EPS.

Strong demand aids topline growth

In Q3FY22, HCL’s revenue grew by 15.7% YoY to Rs. 22,331cr (+8.1% QoQ) making it the highest growth in last 45 quarter. Topline growth was fueled by all round strong double-digit growth across verticals and geographies YoY in constant currency on the back of strong demand. IT and Business Services (ITBS) revenue grew by 16.0% YoY to Rs. 15,775cr (+5.1% QoQ). Engineering and R&D services (ERS) reported revenue grew 14.8% YoY, reaching Rs. 3,547cr (+9.4%QoQ). Products and platforms (P&P) segment rose 14.7% to Rs. 3,014cr (+24.9% QoQ). EBITDA declined 4.1% YoY to Rs. 5,393cr , as EBITDA margin contracted 490bps YoY to 24.2% due to salary increments and higher retention and attrition costs. PAT fell by 13.3% YoY (+5.6% QoQ) to Rs. 3,442cr, due to higher taxes (+96.6% YoY), as a one-time benefit on the tax expense of $59.4m of prior year provision was reversed in Q3FY21.

Strong pipeline to drive the growth ahead

We remain optimistic about the demand environment and HCL’s client relevance, as well as the talent supply capabilities. With net addition of 10,143 employees, the headcount reached 197,777. The Company has announced the acquisition of Starschema, a leading provider of data engineering services based in Hungary which should strengthen HCL’s position in data engineering.

Key concall highlights

* FY22 guidance remains unchanged i.e. double digit constant currency Revenue growth and EBIT margin to remain in the range of 19-21%.

* HCL recorded net new deals worth USD 2,135mn TCV (up by 64% YoY).

* Strong client addition across all categories. $50mn+ clients up by 11 YoY, $20mn+ up by 13 and 50 additions in $1mn+ clients in the last 12 months.

Valuation

Near-term outlook remains cautious, as we have already seen a contraction of margins in this quarter, and we expect the seasonal impact of P&P segment in Q4FY22 to weigh down the company’s financials. However, looking at company’s strong pipeline and expected increase in enterprise demand, we remain optimistic about the company’s performance in medium to long term and we estimate PAT to grow at 16.0% CAGR over FY21-24E. Hence, we reiterate our BUY rating on the stock with a rolled forward target price of Rs. 1,409 based of 22x FY24E Adj. EPS.

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