Buy HCL Tech; target of Rs 1150: Emkay Global Financial

Emkay Global Financial's research report on HCL Tech

HCLT delivered a tad weaker-than-expected operating performance in Q4FY23 due to weak discretionary spending. Revenue declined 1.2% CC QoQ, impacted by seasonality in Software (-14.6% CC QoQ) and decline in ER&D (-3.8%). Services revenue grew by 0.6% CC QoQ in Q4, led by Financial Services (6.9%), HLS (3.6%) and Retail and CPG (0.6%), while Telecom (-5.6%), Manufacturing (-3.5%) and Technology (-1.6%) remained weak. Net new deal intake remained healthy at USD2.07bn in Q4, led by operating model transformation, cloud adoption and vendor-consolidation deals across Financial Services, Manufacturing and HLS. HCLT has guided 6-8% CC revenue growth for FY24 (implied CQGR of 1.4-2.1% over Q1-Q4) and EBITM of 18-19%. Management has guided for 6.5-8.5% growth in Services business in FY24, implying 1.4-2.2% CQGR over the next four quarters. It observed project cancellations and delays in decision-making/ramp-ups in discretionary spending, while RTB spending has not seen much stress.

Outlook

HCLT is well-positioned to weather the storm, given its comprehensive service offerings and well-balanced portfolio across RTB and discretionary spends. We have cut our earnings estimates by 1.9-2.8% for FY24E/25E, factoring in Q4 miss and higher ETR. We maintain our BUY rating with a TP of Rs1,150/share at 17x Mar-25E EPS (earlier 1,160).