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HCLT investor day 2024: Engineering growth

Well-stacked to capture demand across ER&D and IT services We attended HCLT’s Investor Day 2024 wherein the management outlined its strategic objectives and showcased its capabilities in GenAI. We believe HCLT’s go-to-market (GTM) strategy, which combines its IT Services and ER&D business offerings, gives HCLT an edge over its peers. We also witnessed signs of improvement in the demand environment in financial services. As mentioned in our 1QFY25 result note, we believe HCLT warrants a multiple premium to Infosys. We thus maintain our earlier upgraded target multiple of 27x (~10% premium to Infosys). We introduce FY27 estimates in the note and roll over to Sep’26E EPS. Reiterate BUY with a revised TP of INR2,000 (based on 27x Sep’26E EPS).

Key market opportunities and HCLT’s vectors for future growth

The management highlighted significant growth opportunities such as:

* Expansion in the Data and AI markets, driven by rising demand for enterprise business applications and cloud-native solutions.

* Digital engineering opportunities across sectors like telecom, semiconductors, and automotive, with the ER&D market projected to reach USD170b by 2027, growing 8-9% annually.

* Growth in cybersecurity services, fueled by demand for cloud migration and comprehensive security solutions

HCL’s key offerings that would allow it to take benefit of this:

* Full stack AI solutions enhanced by AI foundry and AI force: HCLT’s AI offerings span across chip design, IT processes efficiency, and data & data driven applications. This segment will be a key growth driver as GenAI achieves scale.

* Strategic SAP partnership: HCLT highlighted its industry leading partnership with SAP; it also announced the formation of an SAP migration lab to help clients migrate to SAP cloud and SAP S4/HANA. Only 30% of SAP’s customers have currently migrated to cloud, and according to HCLT, this presents a huge growth vector for the company.

* Integrated GTM strategy: It caters to diverse verticals and provides end-toend solutions across engineering, software, and IT services.

Demand for chip design is strong and HCLT’s chip-to-cloud offerings (complemented by its engineering and IT offerings) position it well to capture semicon demand. However, services spending in hyperscalers is currently weak (owing to capex on data centers and GPUs). We believe this could lead to shortterm volatility in ER&D revenues, which, if managed well, could position HCLT as a growth leader among large-caps over the medium term.

GenAI: AI foundry and AI force to accelerate GenAI deployment for clients, but investments in Data are key for GenAI scale-up

* Successful adoption of GenAI depends on clients' readiness in cloud and infrastructure. Hence, we believe that immediate client investments will be centered on data, cloud, and digital infrastructure. HCLT’s GenAI offerings comprise:

* AI Foundry: Serving as a data factory for AI, HCLT Tech's AI Foundry offers a modernized data and AI stack, which allows clients to, modernize data, build data sets, and implement pre-built AI tools.

* AI Force: AI Force focusses on improving efficiency in IT and business processes, accelerating product development and modernization. HCLT announced AI Force’s integration with Microsoft GitHub Co-pilot as well, which allows clients to implement efficiency gains over the software development life cycle.

* AI Labs: AI experimentation platform and POCs for clients; over 350 GenAI projects have been developed, with plans for further expansion.

* AI and GenAI Engineering: This involves semiconductor and hardware engineering.

* HCLT’s GenAI stack spans across infrastructure, data & hardware, and this positions HCL well to benefit as GenAI scales up.

* Overall, we believe HCLT's focused investments in AI, data, and cloud infrastructure position it to lead in the GenAI space, enabling clients to achieve their digital transformation

HCLTSoftware: Aspires to grow at mid-single digit

* HCLT P&P business is currently growing at a low single-digit rate but with a strong EBIT margin of 24.7% for FY24. The company has an ARR of USD1.02b and has secured 37 new large deals.

* The company plans to accelerate its growth from low to mid-single digits in this segment over the medium term. It plans to expand its geographic footprint into high-potential regions such as India, Africa, and the Middle East, which could unlock new revenue streams and diversify risk.

* HCLT is concentrating on four key areas: AI & Automation, Data & Analytics, Business Applications, and Security & Compliance, which will bode well for this segment.

Project Ascend: Margin expansion plans

Project Ascend focuses on driving efficiencies to fund future growth. HCLT plans to generate margin gains through:

* GenAI-led transformation in delivery, aiming to enhance coding productivity and operational automation.

* The company is also proactively deploying entry-level talent in anticipation of growth, and is seeing increased client acceptance in India, which may shift operations from prime locations.

* While the company also mentioned G&A optimization as a lever, we believe pyramid, fresher deployment and traction in ER&D growth remain the three key drivers for margin expansion.

Financial Services: Big bets are paying off well; focusing on white spaces for growth

* The management stated that HCLT is witnessing some uptick in its order pipeline and demand in financial services compared to previous months.

* HCLT focuses on white space for growth, including insurance brokerage firms, specialized banks, and large central banks.

* The company is deepening its presence in key accounts with notable projects, including digital engagement for a leading LATAM central bank, commercial lending, and tech operations for a Big-4 bank, and payments transformation for a global banking leader

TMT vertical: HCLT‘s chip-to-cloud offerings key differentiator

* HCLT is witnessing fastest growth among its peers in the TMT vertical, with a 1.8% CQGR over nine quarters.

* The company is working with major customers in the sector, and while spending in the sector has remained under pressure, HCLT has bucked the trend thanks to its Verizon deal ramp-up over FY24.

* In the Hi-Tech market, HCLT works largely with big-tech companies in the US

Valuations and View

* HCLT would most likely outperform its peers on growth. Further, its FCF metrics have meaningfully improved recently and are now comparable to both TCS and Infosys. We believe its current performance warrants a multiple premium to Infosys. We thus maintain our earlier upgraded target multiple of 27x (~10% premium to Infosys).

* We introduce FY27 estimates in the note. Reiterate BUY with a revised TP of INR2,000 (based on 27x Sep’26E EPS).

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