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Decent performance; 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.

* Consolidated revenue rose 11.1% YoY, on the back of continued strong demand-driven growth seen in IT & Business and Engineering & R&D Services segments.

* EBITDA inched down 1.9% YoY on contracted margins (-320bps YoY to 24.3%) impacted by higher outsourcing and staff costs. PAT grew 3.7% YoY (+1.7% QoQ) helped by higher other income and lower taxes.

* Company declared dividend of Rs. 10/share for the quarter, totaling to Rs. 26 (incl. Rs. 10 special dividend) per share paid so far in H1FY22.

* Company has a strong deal backlog and has been on a hiring spree in the recent quarters on the back of a strong demand visibility. Though margins remain under pressure in the near-term, we continue to maintain a positive long-term outlook and hereby retain our BUY rating on the stock with a revised TP of Rs. 1,454 based on 25x FY23E adj. EPS.

Demand recovery continues to drive topline growth

During Q2FY22, HCL recorded 11.1% YoY growth in revenue of Rs. 20,655cr (+2.9% QoQ), aided by sustained growth momentum seen in two of its major verticals. IT & Business Services (ITBS) reported revenue growth of 13.2% YoY in constant currency terms reaching Rs. 15,005cr (+5.2% QoQ), led by robust growth seen in its applications practice with Mode 2 delivering a 36% YoY growth (+12.5% QoQ).

Engineering and R&D Services (ERS) vertical revenue grew 12.7% YoY to Rs. 3,242cr (+5.4% QoQ), thereby crossing its pre-pandemic peak of USD 425mn. EBITDA declined 1.9% YoY to Rs. 5,022cr, as EBITDA margin contracted 320bps YoY to 24.3% owing to higher outsourcing and employee costs. However, PAT grew 3.7% YoY (+1.7% QoQ) to Rs. 3,259cr, helped by higher other income (+20.6% YoY) and lower taxes (-16.1%).

Key concall highlights

* Management guided revenue growth of 22-23% on constant currency basis, and EBIT margin to remain in the range of 19-21% for FY22E.

* HCL recorded net new deals worth USD 2.2mn (+35% QoQ, +38% YoY), including 13 large service deals and one product deal across verticals.

* Under the USD 50mn+ category, company added 12 new customers YoY taking the total to 41, plus one new client sequentially in the USD 100mn bracket.

Demand visibility drives hiring spree

Anticipating a strong demand in the coming months, and with new as well as few delayed deals going live, hiring has picked up pace in the firm, with the company having made net workforce addition of around 11,135 employees during Q2FY22. Over the last three quarters, the company has so far hired a combined total of ~32k employees

Valuation

Q3FY22 is expected to fare much better for the company on the back of expected rebound in software sales and certain deferred deals coming to fruition. Company’s order book remains strong, even as it continues to win new deals in the US and European regions. We estimate PAT to grow at 19.0% CAGR over FY21-23E. Hence, we retain our BUY rating on the stock with a revised target price of Rs. 1,454 based of 25x FY23E Adj. EPS.

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