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Improved guidance for FY25E; Green shoots in Financial Services to see for

* HCL Tech reported Q2FY25 revenues at $3,445mn, up 1.6% QoQ and 6.2% YoY in cc terms . In USD terms, reported revenue was up 2.4% QoQ and 6.8% YoY. INR revenue stood at INR288.6bn, up 2.9% sequentially and 8.2% YoY. This growth was well distributed across verticals, geographies, and offerings. Q2FY25 Order Book TCV (new deal wins) stood at $2,218mn. PAT for the quarter came in at INR42.4bn (+10.5% YoY). EPS stood at INR15.6. Free Cash Flow of $2,388mn (on LTM basis) was 119% of net income.

* Traction in AI related opportunities: HCLT is well-positioned to capitalize on emerging opportunities in the GenAI sector with its AI Force digital suite, which enhances workflow optimization, operational flexibility, efficiency, and service quality for clients. The increasing adoption of GenAI technologies is likely to boost demand for cloud services and data standardization, aligning with HCLT's strengths. Key offerings like AI Force and AI Foundry, supported by a global network of GenAI labs, are delivering significant value to clients worldwide. Strategic partnerships with leading hyperscalers, ISVs, and systems OEMs keep HCLT at the forefront of innovation, while strong client interest in their GenAI solutions suggests they will drive efficiency, growth, and innovation in the medium term. Legacy modernization offering shall become a huge growth driver going ahead because of GenAI technologies.

* Improved growth guidance for FY25E: The Services business delivered impressive performance with a 5.9% YoY growth in cc, while digital revenue increased by 7.8%, driven by cloud transformation and cybersecurity, making up 38.5% of services revenue. The software segment showed strong growth of 9.4% YoY in cc, highlighting the increasing importance of its products in the digital economy. Management reports significant traction in AI and GenAI opportunities, as clients seek tangible benefits. They anticipate growth across all verticals (with green shoots visible in financial services) and geographies in Q3, with emerging markets driving growth in ROW geography. Furlough patterns in Q3 are expected to mirror last year's, and discretionary spending is projected to remain stable. As a result of higher-than-expected Q2 revenues, the company has raised its growth guidance for FY25E to 3.5-5% YoY in cc.

* Margins to remain range-bound: Operating margins for the quarter rose to 18.6%, up 149bps sequentially and 14bps YoY due to improved share from software business. Margins shall keep improving in Q3 as well due to seasonality in software business. Management expects margins to remain range-bound in the 18-19% range for FY25E.

* Valuation: The company remains committed to achieving business growth in a sustainable and responsible manner. Their deal pipeline is robust, featuring opportunities in Data & AI, Digital Engineering, SAP migration, and efficiency-driven programs. We have introduced FY27E and expect Revenue/EBIT/PAT to grow at a CAGR of 10.5%/13.5%/13.7% respectively over FY24-FY27E. We upgrade our rating to BUY with a revised target price of INR2,105 implying a PE of 27x on Sep-FY27E EPS of INR78.

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