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Strong quarter; Upgrade to Buy

Healthy growth on revenue: HCL Tech revenue for Q3FY24 came in above our expectation with rupee revenue at Rs 28,446cr, up by 6.7% QoQ and 6.5% YoY and dollar revenue reported was USD 3,415mn, higher by 5.9% QoQ and 5.3% YoY. In constant currency (CC) revenue grew by 6% QoQ and 4.3% YoY. Amongst segments services business contributes 88.1% in revenue and in rupee terms grew by 4.3% QoQ & 6.3% YoY to Rs 25,061cr while it grew by 3.1% QoQ and 4.2% YoY in CC. Further, its digital business now contributes 37.7% of services business and saw a growth of 5% YoY in CC. Its software segment revenue grew by 5% YoY in CC and in rupee terms it grew by 28.2% QoQ to Rs 3,385cr led by growth in subscription and support revenue. Amongst geographies, both America and Europe witnessed decent growth with America grew by 6.7% QoQ and 8.2% YoY to Rs 18,348cr (64.5% of revenue) while Europe grew by 8.5% QoQ and 6.2% YoY to Rs 8,249cr (29% of revenue). Amongst verticals, the largest contributor were Telecommunications, Media, Publishing & Entertainment which was up by 29.3% QoQ to Rs 2,759cr and 25.9% QoQ in CC terms and manufacturing was up by 11.1% QoQ to Rs 5,718cr and 7.6% QoQ in CC.

Healthy margin growth: HCL Tech’s EBIT came in above our expectation wherein it grew by 14.7% QoQ and 8% YoY to Rs 5,644cr and EBIT margin improved by 140bps QoQ and 26bps YoY to 19.8%, despite taking wage hike and impact of furlough in Q3FY24. The margins saw improvement because of better topline performance and productivity. Going ahead, management maintains its margins guidance in the range of 18-19%.

Software business won more deals as well as moderating attrition are key positives: HCL Tech won deals worth USD 1,927mn in Q3FY24, a decline of 17.9% as compared to last quarter of USD 2,347mn. For the quarter, it won a total of 18 large deals out of which 6 were in services and 12 were in software segment and these deals were won across segments such as retail, life science & healthcare, financial services and public services. Further, in terms of attrition the company saw further moderation to 12.8% in Q3FY24 which is a decline of 140bps (14.2% in Q2FY24) as compared last quarter and a decline of 890bps (21.7% in Q3FY23) as compared last year which is positive.

Management tightens revenue growth guidance range: For FY24, management tightened its growth guidance in the range of 5-5.5% in CC terms as compared to earlier guidance in the range of 5-6% in CC. Further, it retained its margin estimates and expects it to be in the range of 18-19%. Also in segments for Q4FY24, good growth is expected in service business but software business is expected to be soft.

Outlook & Valuation: Despite Q3FY24 being a soft quarter, HCL Tech reported strong numbers better than its peers. Management remains confident of growth ahead that would be driven by large deal wins, continuous demand for Gen AI, cloud and automation and improved growth in its service business. We remain positive on the growth prospect of the company from a medium to long term perspective given steady deal wins from America & European regions, lower attrition demand for newer technology. Thus, we estimate its revenue/EBIT to grow by CAGR of 10.5%/14.7% over FY23-26E. On valuation front, we are assigning a P/E of 21x, which is near to its 10 years average multiple and upgrading our rating to Buy (from Accumulate) as well as target price upwards to Rs 1,777.

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