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Steady operating performance; one-off gain leads to profit beat

HCL Tech posted slightly better operating performance than guided by the mgmt. Revenue declined 1.6% QoQ CC due to softness in Services, primarily owing to seasonality and offshoring. EBITM fell by 50bps to 17.1%, a tad above our estimate. Net new deal-wins were healthy at USD1.96bn. The mgmt guided to broad-based QoQ growth in Q2 (ex-Financial Services, owing to divestment of the State Street JV). The mgmt is confident of growth in coming quarters, as clients continue to spend on GenAI and other emerging technologies. HCLT has retained 3-5% CC revenue growth guidance, with 18-19% EBITM for FY25. The guidance does not factor in any improvement in discretionary spends versus last year. Though the mgmt sees initial signs of the discretionary spend pullback bottoming out, it has refrained from affirming any pickup, given previous false starts. We tweak FY25-27E EPS by up to 3.3%, factoring in the Q1 operating performance and one-off gain from the divestment. We retain ADD on HCLT; we raise TP to Rs1,700/sh, at 23x Jun-26E EPS.

Results Summary

Revenue declined 1.9% QoQ (down 1.6% QoQ/up 5.6% YoY in CC terms) to USD3.36bn, broadly in line with our estimates. IT and Business Services revenue declined 1.5% QoQ CC, whereas ER&D Services fell 3.5% QoQ. Software revenue grew 0.4% QoQ. EBIT margin declined by 50bps QoQ to 17.1%, marginally ahead of our estimate of 16.9%. Among verticals, Services revenue growth was driven by Telecommunications (3.9% QoQ), Technology & Services (3.5%), Public Services (1.3%), and Retail (1.2%), whereas Manufacturing (6.8%), Financial Services (4.8%), and Life Sciences (4.4%) saw a decline. Americas grew 0.3% QoQ, whereas Europe and ROW declined 1.5% and 7.6%, respectively. Net headcount decreased 3.6% QoQ to 219,401, with a major portion of the decline being attributed to divestment of the State Street JV (adjusted for divestment, headcount declined 0.3% QoQ). The company has declared an interim dividend of Rs12/share. What we liked: In-line operating performance, healthy deal intake. What we did not like: Weakness in the non-top-20 clients (-3.4% QoQ).

Earnings Call KTAs

i) FY25 guidance anticipates no significant improvement in discretionary spending, though there are indications of the same; the management has chosen not to incorporate these due to previous experiences of false starts. ii) Deal intake was slightly lower than the management's expectations due to continued delay in decision-making in some programs. The order book consists of a mix of small and large deals. iii) ER&D declined 3.5% CC QoQ, mainly due to ramp down in the Manufacturing and softness in the Medtech verticals. iv) Life Sciences segment revenue was impacted by completion of large programs and softness in the Medtech segment. v) In Q2, the State Street transaction is likely to impact revenue by ~80bps at the company level; it will hit the Services business by ~90bps, on QoQ basis. vi) The management highlighted that the ASAP acquisition did not deliver per expectations in Q1, as EV investments are undergoing stress, particularly in Germany. Large auto OEMs have seen cut in spending due to cost pressures. vii) Manufacturing was impacted by passing-on of productivity benefits, weakness in automotive, and asset revenue declining by ~USD10mn (prominent in Manufacturing). Company expects good traction to return from Q2. viii) It has invested in training employees on GenAI and AI skills. It trained 42k employees in FY24 and plans to train ~50k employees in FY25, to take the total trained headcount to 100k by FY25-end. It has already trained ~1/3rd of the incremental requirement in Q1.

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