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HCL Tech (HCLT) reported Q4FY22 revenue of $2,993 mn (up 0.5% q-o-q), missing our forecast of $3,052 mn while beating Street’s forecasts of $2,968 mn. Ebit margin came in at 17.9%, missing our/Street’s forecasts of 18.3%/18.2%. PAT was Rs 35.9 bn, which was higher than our/Street’s forecast.

HCLT reported Services revenue growth of 5% q-o-q (IT and Business Services and ER&D), the highest amongst its peers. ACV for FY22 grew 21% y-o-y, much higher than revenue growth of 12.8%, which bodes well for growth going ahead. Our EPS estimates have changed by -3.8%/-2.4% for FY23E/ FY24E. Maintain ‘Buy’ with a TP of Rs 1,710.

Broad-based growth in Services business: HCLT reported revenue growth of 1.1% in CC. IT and Business Services/Engineering and R&D Services business grew 5.2%/3.9% q-o-q. Separately, Products & Platforms revenue declined by 24% q-o-q. Revenue growth q-o-q was led by Telecom, Media, Publishing & Entertainment (6.8%), followed by Manufacturing (4.3%), Lifesciences & Healthcare (4.1%), and Public Services (3.2%). LTM attrition inched up to 21.9% compared to 19.8% last quarter, which was still lower than the industry.

Numerical guidance for FY23e: HCLT’s FY23E growth guidance is in the range of 12-14% – after FY22’s double-digit guidance. This reflects better demand visibility and better execution capability than last year. Margin guidance was 18-20% for FY23E. TCV of new deal wins came in at $2,260 mn, up 6% q-o-q. This quarter again included a significant number of small deals.

Upcycle to be sustained – Revenue growth in the Core Services business was industry leading, although the Product business weighed on overall growth. However, with the Product business’ portion reducing to 10.2%, we believe overall growth would start strengthening. Retain ‘BUY/SO’ with a TP of `1,710 (28x Q2FY24E) as we roll forward to Q2FY24E.



Author: Howard Caldwell