HDFC Securities maintains ADD on HCL Technologies - Chugging along

Mr. Apurva Prasad, Institutional Research Analyst, HDFC Securities and Mr. Amit Chandra, Institutional Research Analyst, HDFC Securities.

HCL Tech (HCLT) posted in-line services revenue and higher-than-estimated software revenue, driven by Q3 seasonality. IT & Business services and ER&D services posted 2.1% QoQ and 2.5% QoQ respectively. HCLT tweaked its growth guidance lower last month and stands at 13.5 to 14.0% CC growth, including 16.0 to 16.5% CC growth for services. Growth for HCLT in Q3 was led by the manufacturing vertical, telecom, M&E vertical and life-science & healthcare vertical. New deal wins were flat sequentially but up 10% YoY at USD 2.3bn. Margin improvement was driven entirely by the software business and is expected to revert in Q4. Key positive catalyst for HCLT will be (1) increase in large deal wins (currently averaging at 6-7 large deals per quarter), supported by infra services led cost optimisation and vendor consolidation (USD 120bn industry opportunity over three years); (2) synergy services deals from software installed base (synergy pipeline at USD 1bn); and (3) stability in software business (factored -9%, -3%, +4% for FY23/24/25E), supported by launch of new SaaS versions and partnerships with hyperscalers. Maintain ADD on HCLT with TP of INR 1,090, based on 18x Sep-24E EPS. At CMP, HCLT is trading at 18.5x and 17x FY24/25E.

Q3FY23 highlights: (1) HCLT's IT & BS revenue came in at USD 2,326mn, 2.1% QoQ and 15.3% YoY CC, ER&D services revenue came in at USD 539mn, 2.5% QoQ and 16.0% YoY CC and software revenue came in at 30% QoQ and -1.5% YoY CC. (2) EBITM improved 164bps QoQ to 19.6%, supported by lower sub-contracting (-50bps QoQ) and growth in software business as services margin was flat sequentially, offsetting the -70bps impact from mid[1]level wage increase. (3) New deal TCV was up 10% YoY and 2% YoY in ACV terms, implying increase in deal duration. (4) Net addition was 2.9k in Q3, taking the headcount to 222k, and fresher hiring is expected to be dialled down with a drop in attrition.

Outlook: We have factored in USD revenue growth at +9.4/7.3/7.1%, IT&BS growth at +11/8/7%, ER&D growth at +17/10/9%, and P&P growth at -9/-3/+4% for FY23/24/25E respectively. We factor in EBITM at +18.1/18.0/18.0% for FY23/24/25E.

Shares of HCL Technologies Limited was last trading in BSE at Rs. 1077.95 as compared to the previous close of Rs. 1071.90. The total number of shares traded during the day was 324224 in over 16766 trades.

The stock hit an intraday high of Rs. 1083.50 and intraday low of 1042.00. The net turnover during the day was Rs. 346143085.00.

Source : Equity Bulls

Keywords

HCLTechnologies INE860A01027 HCLTECH HDFCSecurities Q3FY23 ResultUpdate