HCL Technologies - Deja vu - ICICI Securities

HCLT's results exhibited a similar theme as the last three quarters: strong services growth, margin performance impacted by weak Products business, and a healthy TCV. HCLT reported a miss on revenue growth at 1.1% QoQ CC (vs Isec: +1.5%). Miss was on account of 24% QoQ CC decline in Products and Platforms but Services (ITBS and ERS) posted strong growth of 5% QoQ CC. We would like to highlight that since last three quarters, Services business has consistently grown organically at 5.0% CC QoQ or higher (highest amongst Tier-I). Among Services, IT services posted strong growth of 5.2% QoQ and ER&D posted 4% QoQ CC growth. Q1 is a seasonally weak quarter because of pass-through of productivity benefits and HCLT expects Q1FY23 to be no different. HCLT has guided for 12-14 YoY CC growth for FY23, and we expect revenue growth of 13%/12.3% YoY USD in FY23/24.

On P&P business, management mentioned 20 products have high growth potential and large market opportunities. HCLT will continue investing in these products (HCLT invests $200mn every year in P&P R&D). These will become the bed-rock of P&P growth going forward. Total revenue of P&P segment is at $1.4bn and 73% of the revenue (non-licence) is stable and growing, while 27% of the business is volatile based on quarterly booking. Subscription-support services, Professional services and Product and license sales account for 67%, 5% and 28% of revenue.

Product and license sales are a volatile component and revenue recognition depends on quarterly bookings. HCLT's focus is to convert this stream of revenue into subscription-based model. Many of these products are already available in SAAS versions, which will reduce quarterly volatility of P&P segment going forward. We continue to believe that Products business has low growth characteristics; hence, we model a revenue decline over the next two years.

HCLT reported EBIT margins at 17.9%(-110bps QoQ) vs our estimate of 18.5%. Margin decline was on account of lower mix of P&P revenue. IT services margins expanded 90bps QoQ to 17.5% and ER&D services margins rose 50bps QoQ to 19.1%. HCLT has guided for EBIT margin range at 18-20%(in line with our estimates) for FY23, below its earlier guidance of 19-21%. We are estimating EBIT margins at the lower end of the guidance at 18% in FY23 and 19% in FY24. Our EPS estimates get reduced by 3%/1% for FY23/24 on account of cut in margin estimates. HCLT trades at 21x/18x PE on EPS of Rs.52/61 for FY23/24. HCLT's pre-covid (FY18-20) average PE multiple stands at 13.4x vs 20x avg. PE multiple for FY20-24 - a premium of 43% but EPS CAGR stands at 12% for FY22-24 vs 14% for FY18-20. We do believe that HCLT's underperformance in growth and margins w.r.t. to peers will continue, but risk-reward looks favourable to us. We maintain HOLD rating with multiple of 19x on FY24E EPS of Rs61 to arrive at a target price of Rs1,150 (prior: Rs1,177).

Shares of HCL Technologies Limited was last trading in BSE at Rs. 1099.60 as compared to the previous close of Rs. 1089.55. The total number of shares traded during the day was 112635 in over 9487 trades.

The stock hit an intraday high of Rs. 1105.00 and intraday low of 1081.30. The net turnover during the day was Rs. 123139660.00.

Source : Equity Bulls

Keywords

HCLTechnologies INE860A01027 Q4FY22 FY2022 ResultUpdate ICICISecurities