Add HCL Technologies Ltd for Target Rs. 1,500 by Choice Institutional Equities
Key Conference Call Highlights
Segment Performance
* Services Business: For the full year, the services business achieved a growth of 4.8%. This was driven by ER&D Services, which grew 9.8%, and IT and Business Services (ITBS), which increased 3.7%. In Q4, Technology (+17.8% YoY) and Public Services (+10.7% YoY) were the leading growth verticals.
* HCL Software: Revenue for the fiscal year stood at USD 1.4 Bn, a decline of 4.1%. Q4 revenue saw a sharp 28.1% sequential drop, attributed to typical seasonality and delays in procurement decisions in March, particularly within the US government and due to volatility in West Asia.
* Vertical Headwinds: The Telecom vertical faced substantial pressure as two large US clients significantly cut discretionary spending in digital and engineering services towards the end of Q4. Additionally, two large SAP modernisation programs were discontinued due to client budget reprioritisations.
Geographical Performance
* Americas: Grew 4.9% YoY in Q4. Despite this, the management noted that two specific clients in North America would present a 50 bps growth headwind in FY27 due to internal business challenges unrelated to the broader macroeconomy.
* Europe: Recorded a decline of 2.9% YoY in Q4. The management highlighted visible softness in the European market compared to a more robust North American environment.
* ROW and India: These geographies showed the strongest momentum, with ROW growing 16.6% YoY and India reporting a 5.3% YoY increase.
Margin Trajectory
* HCLT reported a full-year operating margin of 17.2%, representing a decline of 107 bps YoY. Excluding one-time restructuring costs, the margin was 17.9%.
* Q4 Margin Walk: The Q4 EBIT margin was 16.5% (17.7% excluding restructuring). The margin was negatively impacted by software seasonality (- 181 bps), employee increments (-45 bps), and bad debt provisions (-19 bps).
* Efficiency Offsets: These headwinds were partially offset by forex gains (+65 bps) and the company's internal efficiency program, Project Ascend (+13 bps).
Outlook & Guidance
* Revenue Growth: Projected between 1% to 4% in CC terms, with Services revenue expected to grow 1.5% to 4.5%.
* Operating Margin: EBIT margin guidance is set between 17.5% to 18.5%.
* Key Assumptions: The guidance accounts for the expected 50 bps drag from two specific American clients and assumes a continued soft discretionary spend environment at the lower end. It excludes pending acquisitions like the HPE Telecom Solutions Group and Jaspersoft.
AI Initiatives
* Financial Impact: Annualised Advanced AI revenue reached 155.1 Mn (+6.1% QoQ).
* AI Market Categorisation: Management views the industry in three segments: 1. AI Disrupted (40%): Traditional services facing a 3% to 5% deflationary impact on pricing. 2. AI Augmented (55%): Services like cloud and cybersecurity growing at 10%+. 3. AI Native/Advanced (5%): High-growth areas like AI Factories and Custom Silicon Engineering, expected to grow at 30%.
* Strategic Wins: The company secured a major USD-100 Mn+ AI Factory deal to design and operate a next-generation AI data center using latest GPU technologies.
* Platforms and Partnerships: The AI Force platform is now deployed across 75 accounts. Strategic collaborations have been expanded with Google Gemini, AWS, NVIDIA, CrowdStrike and OpenAI.
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