Buy HCL Technologies Limited For Target Rs. 1,760 - Geojit Financial Services Ltd.
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Muted Q3FY24, cost optimisation continues.
HCL Technologies Ltd (HCL) is into software development and business process outsourcing, as well as providing IT infrastructure services. It has operations in 60 countries, with a client base that includes Fortune 500 and Global 2000 companies. As of end-Q3FY24, the employee count was 224,756.
* The company delivered muted performance in Q3FY24, with slight increase in topline and margins amid a challenging macroeconomic environment. Consolidated sales grew 6.5% YoY to Rs. 28,446cr (4.3% YoY in constant currency terms), owing to increase in recurring revenue in its software business.
* EBITDA margin widened 10bps YoY to 23.9%, due to lower discretionary spends and furloughs.
* In Q3FY24, Company performed far better amongst its top competitors in the IT industry. Order pipeline rose at a tepid pace and remain optimistic on improving margin in the medium term. Hence, we upgrade our rating on the stock from HOLD to BUY, with a roll forward target price of Rs. 1,760 based on 23.5x FY26E adjusted EPS.
Software and IT business services supported topline in Q3FY24
The company’s consolidated revenue rose 4.3% YoY in constant currency (cc) terms because of stable performance of the software and services businesses. The software business rose 5.0% YoY on cc basis, propelled by subscription-related revenue. Average recurring revenue from term licenses business rose 2.9% YoY in cc terms to $1.06 billion. The IT and business services segment grew 4.3% YoY, due to increase in average run rate. Engineering and R&D business, including consolidation from ASAP acquisition, delivered muted performance, rising 3.6% YoY. Revenue of the US operations, however, grew 6.7% YoY in cc due to increased demand and continued addition of Fortune 500 and Global 2000 customers. EBITDA margin, after adjusting with wage increases and furloughs, widened 10 bps YoY to 23.9%.
Key concall highlights
* HCL slightly lowered its FY24 revenue guidance to 5.0-5.5% from 5.0-6.0% provided in Q2FY24, though it retained its EBIT margin guidance of 18-19% in Q3FY24.
* The company declared dividend of Rs. 12 per share for Q3FY24 vs. Rs. 10 per share in Q3FY23.
* Employee headcount increased to 224,756 in Q3FY24 from 221,139 in Q2FY24, with a significant addition of freshers and technical personnel. Also, the attrition rate reduced further to 12.8% in Q3FY24 vs. 14.2% in Q2FY24 and 29.2% in Q3FY23.
Soft order pipeline
HCL bagged six new deals in its services business and 12 new deals in its software business in Q3FY24, totaling US$1,927 million. The amount was comparatively lower vs. $2,347mn in Q3FY23, owing to the absence of large deal wins.
Valuation
The management expects low discretionary spending further, which could keep margins in check. However, technology spends on cloud migration, Gen-AI, SAP, data modernization, cyber security, automation, and advanced analytics will remain resilient. This should further increase efficiency and improve customer experience thereby strengthening the order pipeline for future periods. Though, HCL delivered soft order pipeline in Q3FY24, we remain optimistic on improving margin on cost optimization. Hence, we upgrade our rating on the stock from HOLD to BUY, with a roll forward target price of Rs. 1,760 based on 23.5x FY26E adjusted EPS.
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SEBI Registration Number: INH200000345
