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HCL Tech reported decent Q2FY24 revenues at $3,225mn (in-line with our estimates), up 1% QoQ and 3.4% YoY in cc terms. In USD terms, reported revenue was up 0.8% QoQ and 4.6% YoY. INR revenue stood at INR266.7bn, up 1.4% sequentially and 8.0% YoY. Q2FY24 Order Book TCV stood highest at $3,969mn, consisting of 10 large deals in Services and 6 in Software. PAT for the quarter came in at INR38.3bn (+8.6% QoQ and +10.0% YoY) with EPS at INR14.2. HCLT also added clients across $50Mn+ and $20Mn+ revenue brackets.

* Segments & Verticals: Geographically, Americas and Europe reported 3.9% YoY cc growth while ROW reported a negative growth on cc basis YoY. Among verticals, Financial services reported CC growth at 12.5% YoY, Lifesciences grew 9.8% YoY in CC and Retails & CPG grew 8.1% YoY in CC. Technology vertical continues to be weak and is expected to recover in the coming quarters. Both the services segment, Engineering and R&D services and IT and Business Services grew 5.0% and 0.9% QoQ in cc terms.

* Acquisition of ASAP: ASAP acquisition completed on 31st August, 2023 and got integrated into Engineering and R&D services. Acquisition will help HCLT to address the growth opportunities in auto engineering segment where it will work in areas such as autonomous driving, e-Mobility and connectivity. It will serve top automotive OEMs and Tier-1 suppliers in Germany with the help of its 1,600 employees.

* Margins to remain range-bound: Operating Margins rose to 18.4% for the quarter, up 157bps sequentially and 51bps YoY. Margin expansion was led by efficiency in managed services operations driven by automation and ASAP acquisition and optimisation of sub-contracting cost. Due to a moderating growth environment and limited pricing growth, the management expects margins to stay range-bound between 18%-19% range.

* Attrition levels declining : On the employee front, HCL Tech has reported negative net addition for this quarter (-2,299 employees) while they added 3,630 freshers. The total employee headcount now stands at 2,21,139. The company reported LTM voluntary attrition rate at 14.2%, compared to 16.3% in previous quarter and 23.8% in Q2FY23. The management indicated that it will adjust its hiring strategy based on projected demand. Management plans to roll out annual hikes in Q3.

* Outlook and Valuation: All-time high bookings driven by a standout mega deal underscores the ability to seize exceptional opportunities in this uncertain macro environment. Management expects H2 to be better than H1 and has guided for 5-6% YoY cc growth for FY24E. HCL continues to focus on improving its ROIC. We have introduced FY26E and expect Revenue/EBIT/PAT to grow at a CAGR of 9.4%/11.7%/11.8% respectively over FY23-FY26E. We upgrade our rating to ADD with a revised target price of INR1,300 implying a PE of 17x (unchanged) on FY26E EPS of INR76.5. 

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