April 26, 2023
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HCL TECHNOLOGIES Stock Research Report by ICICI Securities
Sector: IT Services & Consulting
CMP Rs. 1038, Target Rs. 1065 (3% upside potential)
Target Period: 12 Months
HCL TECHNOLOGIES Stock Research Report: Inline results and guidance: Low exposure to troubled BFSI clients leads to better outcome
HCL Tech (HCLT) reported its Q4FY23 revenues at US$3,235mn, down 0.3% QoQ in USD and down 1.2% QoQ in CC terms (better than our estimate of -1.9% and consensus at -1.5%). Revenues in CC terms were up 10.5% YoY in Q4FY23. IT and business services (74% of revenues) grew 1.6% QoQ CC, ER&D (16% of revenues) declined 3.8% QoQ CC, due to delay in decision-making in discretionary spending. HCLT’s software business (~10% of revenues) fell 14.6% QoQ CC due to seasonality. For full year FY23, the company’s services segment grew 15.8% CC, slightly lower than the annual guidance of 16-16.5%. Q4FY23 EBIT margin came in at 18.2%, lower than our estimate of 18.9% and consensus at 18.4%, due to which EBIT of Rs48bn was 4% below our estimate and 2% below Bloomberg consensus. PAT at Rs40bn was 2% below I-Sec estimates and 3% above Bloomberg consensus.
New deal wins’ TCV was soft at US$2,074mn, down 8% YoY. Company won 13 large deals in Q4FY23 vs 17 in Q3FY23 and 10 in Q4FY22. Headcount at 226K was up 1.7% QoQ and 8.2% YoY.
Guidance: HCLT has guided for 6-8% CC growth for FY24 and 6.5-8.5% for the services business. This is in line with I-Sec and consensus expectations and compares to the 13.7% CC growth in FY23. On EBIT margin, HCLT has guided for 18-19% for FY24 vs 18.2% in FY23.
What to do with the stock:
HCLT’s limited exposure to troubled BFSI clients and recent large deal ramp-ups in the BFSI vertical led to strong segmental growth of 6.9% QoQ CC, contrary to weak growth at both TCS and Infosys lately. Also, HCLT’s lower exposure to discretionary projects over Infosys and higher towards run side of the business, led to hardly any major project ramp- downs or cancellations. As a result of these two factors, we expect HCLT to grow faster than both Infosys and TCS in FY24. We estimate HCLT growth at 7.9% YoY in CC terms for FY24E, close to the top end of the guidance of 6-8%. As a result, we increase our revenue forecasts over FY24E-FY26E by up to 2% each year. On EBIT margin, we have lowered our outer year assumptions due to the company’s higher focus on cost take-out deals in which margins are lower. Due to our higher tax rate assumption, we lower our FY24E-FY26E EPS forecasts by 2-5%. We maintain our HOLD rating on HCLT with a revised 12-month target price of Rs1,065. This implies 3% potential upside wherein the stock may react positively to HCLT’s results given the management’s better growth guidance than Infosys and no mention of project cancellations / ramp-downs.
HCL TECHNOLOGIES Stock Research Report: Key takeaways from earnings call
● Deal pipeline remains near all-time highs with spread across geographies, verticals and service lines. Large cost take-out deals are in the pipeline, more around the run side of the business.
● HCLT is not seeing any stress in the run side of the business, but sees delay in decision-making in discretionary spending.
● Company saw strong growth in the BFSI segment during Q4FY23 with increase of 6.9% QoQ CC (contrary to weakness seen in the case of both TCS and INFY) on the back of ramp-up of large deals. HCLT has less than 1% revenue exposure to the overall BFSI vertical (toward smaller regional banks in US), which is the reason the company is less impacted by the recent crises. It sees good growth outlook for the BFSI vertical with recent deal wins across geographies including the US, EU and Latin America.
ER&D saw weak growth during the quarter due to cuts in discretionary spending, largely in the hi-tech and telecom verticals.
● HCLT expects attrition to further drop from current level of 19.5% given easing of demand- and supply side pressures.
● On pricing, HCLT expects it to remain stable in the current environment with certain pressures in cost take-out deals. This is one of the reasons for the muted EBIT margin guidance.
● Company expects tech spend intensity to remain higher than pre-pandemic levels given the core modernisation initiatives; it also expects the time to recovery in demand to be short. Note: Target price methodology – Our 12-month target price of Rs1,065 is based on 16x FY26E EPS of Rs 75, discounted back by WACC of 12%.
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