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Seasonality in Software segment led to muted financial performance

Result Synopsis

HCL Technologies (HCLT) reported broadly inline financial performance. While, revenue growth was inline with estimates; EBIT margin came in below expectation. The Services segment (89.8% of revenue) grew by 0.6% QoQ in cc terms. The Software segment had weak quarter due to seasonality (down 14.6% QoQ in cc terms). The revenue growth was led by strong performance in BFSI vertical (up 6.9% QoQ in cc terms). There was sequential decline in EBIT margin (down 141 bps QoQ) led by weak performance in high margin Software segment. Employee attrition continues to moderate as LTM attrition was down 220 bps QoQ to 19.5%.

We believe that the long-term demand story remains intact led by IT transformation and cost optimization projects. However, the macroeconomic factors in the US and Europe remain concerning and that is reflected in clients being more watchful of the situation and consequently, we expect moderation in growth in near term. The decline in employee attrition and improving employee pyramid should support margin in FY24. We estimate revenue CAGR of 11.1% over FY23?25E with average EBIT margin of 19.1%. We maintain our ADD rating on the stock with revised target price of Rs 1,213/share at 17x on FY25E EPS. The stock trades at PER of 16.4x/14.5x on FY24E/FY25E EPS

Result Highlights

? Reported revenue of Rs 266.1bn (down 0.4% QoQ in INR terms, down 0.3% QoQ in USD terms). HCL software segment (10.6% of revenue) grew by 8.2% YoY in cc terms, while Product and IT services (89.9% of revenue) increased by 10.6% YoY in cc terms. The revenue declined by 1.2% QoQ in cc terms. BFSI vertical reported highest sequential growth at 6.9% QoQ in cc terms.

? EBIT margin decreased by 141 bps QoQ to 18.2% led by increase in SG&A Expenses. ? It reported new deal wins TCV of $2.1bn (down 8.0% YoY). Headcount grew by 3,674 employees QoQ to close at 225,944 employees. LTM attrition decreased by 220 bps QoQ to 19.5%

? Declared dividend of Rs 18 per share with payment date as May 09.

? Revenue growth guidance for FY24 between 6.0%-8.0% YoY in cc terms, while EBIT margin guided to be in the range of 18.0%-19.0%

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