Prabhudas Lilladher's research report on HCL Technologies
The quarterly performance was impacted by lower than anticipated growth in P&P business (down 2.1% YoY CC), otherwise the momentum within service business was strong (up 2.2% QoQ CC) despite furloughs. The lower renewal rate within P&P and cautious behavior among clients took a hit on the segmental revenues, which might extrapolate to Q4. Additionally, the service business (IT +ER&D) is likely to see some softness in Q4 due to delayed ramp up of large deals, while few mega deals are anticipating a planned closure. Keeping aside the quarterly volatility, the overall demand scenario is shaping up well with discretionary spendings picking up pace on cloud migration and app modernization activities, which we believe would support the revenue growth in the medium to long-term. The revised FY25 revenue guidance includes 50bps contribution from the recently integrated HPE CTG assets. Based on the revised guidance, the ask rate (Service organic) for 4Q would be -1.3% to +0.6% CC QoQ. We are factoring in the unanticipated delays and planned ramp down, baking in revenue growth of 4.8% YoY CC (5.3% earlier) in FY25, while anticipating 8.8% and 11.0% CC revenue growth in FY26E/FY27E respectively. Margin performance exceeded our 3Q estimates by 40 bps despite one-off charges, furloughs impact and strong headcount additions. Considering the Q4 softness and normalizing P&P segment, we are not passing on these benefits to Q4 and keep our margins unchanged at 18.2%/18.9%/19.5% for FY25E/FY26E/FY27E. Valuations are peaked, while all positives are pricedin, maintain ACCUMULATE.
Outlook
Given its defensive business mix and resilient vertical portfolio, HCLT is well positioned to capture the boarder market theme and participate in the critical aspects of enterprise operations. We are baking in USD revenue/Earnings CAGR of 7.9%/12% between FY24-27E. The stock is currently trading at 28x/24x FY26E/FY27E. We maintain “ACCUMULATE” on HCL Tech assigning PE of 26x to FY27E with a target price of Rs. 2,080.
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