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Exceptional all-round performance

Implied 4Q guidance suggests a continuation of industry-leading growth

* HCL Technologies (HCLT) delivered a robust 3QFY24 performance, with a 6.0% QoQ revenue growth in constant currency (CC) terms, ahead of our estimate of +4.4%. This growth was driven by seasonal gains in HCL Software (P&P), which rose 34% QoQ. HCLT’s Services grew 3.1% QoQ in CC terms (110bp ahead of MOFSLe), with healthy growth in both the IT and ER&D verticals. The TCV was at USD1.9b, down from 2Q’s high base of USD4.0b. HCLT narrowed its FY24 USD revenue growth guidance to 5.0%-5.5% YoY in CC (vs. 5.0-6.0% YoY earlier, including ASAP) for both consolidated and Services segment.

* The EBIT margin also exceeded expectations at 19.8% (+130bp QoQ), led by HCL Software, which achieved 32.9% margin. The Services margin contracted 50bp QoQ though. HCLT retained its EBIT margin guidance band of 18-19%.

* We were impressed by the strong beat on both Services and P&P from the company, despite various macro headwinds that have led to a decline in growth among key competitors. More importantly, the implied 4Q guidance for the Services vertical indicates that it will grow next quarter despite lower deal wins and a high base. This is in contrast with peers who have indicated a tough quarter led by macro challenges. In our view, this should help HCLT narrow the valuation gap with our coverage universe.

*HCL Software delivered strong growth, even adjusted for the seasonality. The organic growth of 5.0% YoY was also one of the strongest performances it has delivered post-acquisition. With growth picking up in this business over the next two years, it can become a tailwind for the stock price.

* We forecast HCLT to deliver an FY24 USD CC revenue growth at the midpoint of its guidance, which should help it report a revenue CAGR of 9.8% over FY23-26. We project HCLT to deliver an FY24 margin near the mid-point of its guidance, and further improve it to 19.2% in FY26. This should lead to an INR PAT CAGR of 12.7% over FY23-26E.

* The strong growth guidance and margin performance in a weak demand environment should boost investor confidence on HCLT’s business and reduce the valuation gap with larger Tier-1 peers. HCLT remains our top pick in the IT Services coverage for 2024.

* After the strong 3Q results and beat, we have raised our FY24-26E EPS by 3- 4%. We reiterate our BUY rating with a TP of INR1,880, as we roll forward our P/E-based valuation to FY26 and assign a multiple of 24x.

Strong operating performance, but guidance disappointed

* HCLT posted revenue of USD3.4b, up 6.0% QoQ in CC (+5.9% QoQ reported), beating our estimates of +4.4% QoQ.

* Services business grew 3.1% QoQ in CC, led by IT Services (+1.9% QoQ in CC) and ER&D (+8.7% QoQ in CC, including ASAP’s inorganic impact).

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