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Guidance increased for FY25

HCL Tech’s (HCLT IN) Q3 revenue was helped by its products and platform (P&P) and Engineering and R&D (ER&D) businesses, even as revenue from IT Services was relatively muted. The company is expecting some softness in Q4 given certain project completions as well as usual sequential decline in the P&P business. HCLT is seeing green shoots in most of the sectors, except Manufacturing & Life Sciences – Expect revenue to see an uptrend in CY25/FY26. Margin at the company level was helped by the P&P business, which reported superior margin, even as margin for IT Services was hit by wage hike, as expected. HCLT has increased the lower end of its FY25 revenue growth guidance to 4.5% in CC from 3.5% earlier. It has retained the higher end of its guidance at 5%.

HCLT continues to see pressure in the Manufacturing vertical (due to continued stress in Auto space and Aerospace verticals in Europe) as also in Life Sciences. It continued to guide for low to mid-single digit growth in the P&P business.

P&P to drive growth: HCLT reported a revenue growth of 3.8% QoQ/4.1% YoY in CC at the company level. IT Services (73% of the mix) reported a 1.5% revenue growth sequentially in CC. ER&D reported a 5.4% QoQ CC growth and P&P 18.7% QoQ growth in CC. Verticalwise, BFSI, Retail and Telecom reported a sequential 1.6%, 13.2% and 4.2% rise respectively. Geography-wise, USD growth was aided by America (up 3.2% QoQ) and Europe (up 1.8%). HCLT recorded a new deal TCV of USD 2.1bn in Q3, up 8.7% YoY. Attrition was up 30bps QoQ to 13.2% and headcount by 2.1K in Q3.

P&P business lifts margins: HCLT reported a 93bps QoQ increase in margin at the company level. In IT Services, the impact of wage hike on margin was 80bps, which was mitigated to some extent by operating efficiencies, resulting in a 35bps drop in margin for IT Services . The P&P business helped margin at the company level by more than 110bps, while headwinds include furlough impact as well HPE integration

We recommend Sell with a TP of INR 1,570: We favor HCLT as the addressable market for all of its three businesses offers a smooth runway to growth. In our view, the current market price largely captures in any revenue growth recovery and positive business sentiments in the medium term. Hence, we do not see any meaningful upside from the current level, as valuations at 28x and 26x in FY26E/27E are rich (>100% premium to average pre-Covid valuations).

In our view, the upside seems limited from the current market price. We recommend Sell. We tweak some of our estimates i.e FY27 on incremental cost pressures resulting some downside estimates and hence TP comes down to INR 1,570 (vs INR 1620 earlier), based on 21x FY27E EPS of INR 76.5. Key upside risks are any meaningful change in margin guidance in the future.

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