HCL TECH LTD Stock Research Report

BETTER BUSINESS MATRIX; BEATING GROWTH COMPARED TO LARGE CAP PEERS…

HCL Technologies (HCLT) is India’s third-largest IT services exporter with a strong global presence. It offers industry-wide solutions, including next-gen services such as Cloud Computing, Digital Transformations, IoT, Machine Learning, and ER&D. Additionally, HCLT has expertise in providing solutions in banking, financial services, and other sectors through its product and platform portfolio.

Key Rationale

◼ Capitalizing demand for digital transformation services:

The recent deal trend remains robust for HCL Tech, reflecting strong traction in BFSI, Retail & CPG, and Manufacturing verticals. HCL Tech will continue to invest in digital capabilities, digital talent, and S&M to drive growth. We believe the company has a significant opportunity to achieve strong organic growth across various verticals globally. The ramp-up in the Verizon deal will also contribute to better revenue growth for HCL Tech compared to its peers.

◼ Robust deal wins despite challenging macroeconomic conditions:

HCLT’s deal pipeline remained industry-leading in Q2FY25 at $3.2 Bn. Despite uncertainty across verticals such as BFSI, Communication, Manufacturing, and Automobile, HCLT secured many large transformation deals. This robust deal pipeline enhances revenue visibility for FY25-26E. The company won 21 large deals, including 13 in the Services vertical and eight in the Software vertical. With a strong deal pipeline, the company anticipates signing mega deals in FY25 as well.

◼  The robust recovery in ER&D; IT Services & Products remain Flat:

IT services, comprising 72% of revenue, showed a growth of 4% QoQ. However, ER&D services, accounting for 16.4% of revenue, declined by 1.6% QoQ despite strong traction for automation. IT software, which represents 12.3% of the company’s revenue, improved by 18.5% QoQ. While the near term outlook remains uncertain, management is confident about the company’s medium to long-term prospects.

◼  Accelerating demand for ER&D services:

Digital engineering spends is accelerating across industries, with companies swiftly transitioning from traditional to digital engineering. Major industries such as Manufacturing, BFSI, Media & Technology, Retail, Healthcare Payers & Providers, and Travel & Hospitality are developing new products and services to differentiate themselves, thereby creating significant opportunities for the company. HCL Tech’s large pool of expertise in the ER&D vertical enhances its vertical-specific capabilities in ER&D services.

◼ Capitalizing on growing investment in the Transportation vertical:

The outlook for the Auto sector remains strong, with a growth of 30% YoY. HCLT is uniquely positioned to meet the increased demand in areas such as Infotainment, Connected, ADAS, Autonomous, and Hybrid & Electric Mobility. In the Semiconductor sector, recent softness due to macro issues has been observed; however, management anticipates demand recovery in the latter part of the year, driven by high-performance computing, AI, and automotive segments. Growth in the medical vertical has been paused over the last couple of quarters, but opportunities in Predictive, Proactive, and Personalized patient care, connected devices, digital platforms, the shift to value-based care, and the need for accelerated testing should help it grow in H2FY25.

◼ Outlook & Valuation:

HCL Tech is well-placed to encourage long-term growth, given its multiple long-term contracts with the world’s leading brands. Enhanced revenue visibility instils confidence in its future business growth. However, rising concerns over business uncertainties in large economies and ongoing supply-side constraints present challenges for the company’s growth prospects moving forward.

◼ Key Risks: a) Slowdown in North America may impact IT spend creating an adverse impact on revenue growth.

Key Financials (Standalone)