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HCL Tech’s revenue growth of 0.8% QoQ fell short of our estimates, while EBITM expansion of ~150bps was above our expectation. ER&D revenue grew by 5% CC QoQ (organic 1.6%) after two quarters of a sequential decline. It reported new bookings of ~USD4bn in Q2, its highest booking ever, driven by a mega deal (Verizon). Management has slashed FY24 revenue growth guidance to 5-6% CC YoY (earlier 6-8%), citing weak discretionary spending and lowerthan-expected performance in H1. Revised guidance implies revenue CQGR of 4.0-5.3% in H2, which management remains confident of achieving, considering the planned ramp-up in recent large deals (Verizon deal ramp-up w.e.f. November 1, 2023), software business seasonality, ongoing business momentum, and contribution from ASAP. Management has retained EBITM guidance of 18-19% for FY24. We tweak our FY24-26E EPS estimates (less than 1% change), factoring in Q2 performance and FY24 guidance revision. We maintain our BUY rating with a TP of Rs1,360 at 19x Sep-25E EPS.

Result Summary Revenue grew 0.8% QoQ to USD3.2bn (1% QoQ/3.4% YoY in CC), slightly below our estimate of USD3.25bn. IT & Business Services saw an uptick of 0.9% QoQ, while ER&D grew sharply by 5% QoQ (including ASAP’s acquisition, 1.6% QoQ organic growth). Products and Platforms declined 4% QoQ. EBITM expanded by ~150bps QoQ to 18.5%, well above our estimate of 17.5%. The services segment’s margin expansion was 212bps QoQ, aided by productivity, utilization and optimization of third-party contractors (+100bps), rationalization in discretionary spending like travel, recruitment and legal costs (+50bps), overhead reduction (+70bps), currency benefits (+10bps), which were offset by the impact of the acquisition (-10bps). HCL Tech signed 10 deals in Services and 6 deals in Software, with a total new-deal TCV of ~USD4bn in Q2. Among geographies, U.S., Europe and ROW saw growth of 1.4%, 0.8% and 6.1% QoQ (in CC), respectively. Headcount declined again in Q2FY24, down by 1% QoQ to 221,139. The company declared a dividend of Rs12/share. What we liked: Healthy margin performance, strong deal wins, continued momentum in BFSI, healthy cash conversion (OCF/EBITDA at ~115%), and further moderation in attrition. What we did not like: Cut in revenue growth guidance and weakness in technology and services.

Earnings Call KTAs i) Services revenue growth was driven by strong sequential growth in Retail and CPG (7.5% CC QoQ), Telecom and Media (6.2%), Financial Services (1.7%), and Lifesciences and Healthcare (1.6%). Technology & Services remained weak (-0.4% QoQ, -9.5% YoY); however, management is hopeful of growth coming back going ahead. ii) The company highlighted its two-pronged strategy on AI. On the client-facing side, the company is working on generating early-stage opportunities and training its delivery organization to leverage GenAI for core development, deployment, testing, and managed services. Secondly, HCLT is leveraging GenAI internally across all the corporate functions, primarily to improve employee experience and productivity with various programs being in the pilot phase. iii) The deal pipeline remains healthy, although it is a tad lower than earlier, after the closure of a mega deal. iv) ASAP’s acquisition contributed ~0.5% to the overall revenue and ~0.6% to services revenue (one month integration). v) Weakerthan-expected growth in H1 led to a cut in FY24 revenue growth guidance. The company expects services organic revenue growth to be 4.5-5.5% CC in FY24, implying a 2.5- 3.8% CQGR over Q3-Q4. Considering the volatile demand environment, management remains reluctant to provide a view on FY25 growth trajectory. vi) Wage hikes will now be undertaken in October, with a potential impact of 60-65bps in Q3 and additional 25- 30bps impact in Q4.

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