HCL Technologies (HCLT IN) – Pritesh Thakkar, Research Analyst, Prabhudas Lilladher Pvt. Ltd.
Rating: BUY | CMP: ₹1,560 | TP:₹1,790
Q1FY25 Result Update – Gearing up for growth from Q1 trough
Quick Pointers:
§ Better-than-expected Q1 performance de-risking the path to achieve the guidance band
§ Margins to be under pressure, likely to be in the lower band
HCLT reported Q1FY25 revenue of US$ 3.36bn, down 1.6% QoQ CC above our and consensus est. of 1.9% QoQ CC, while dollar terms revenue declined by 1.9% QoQ. IT & Business Services and ER&D declined by 1.5% and 3.5% QoQ CC, while P&P was flat QoQ CC. EBIT margin declined by 50bps QoQ to 17.1%, in line with consensus. Surprisingly, IT Services margin was flat QoQ. The company’s deal win in the quarter was normalized to US$ 1.96bn vs last quarter, down 14.4% QoQ. Despite the revenue decline, the company’s performance exceeded Q1 expectations. We believe this could support the company achieve FY25 rev. guidance band of 3-5% YoY CC.
The anticipated Q1 performance impact was largely attributed to the project transitioning (BFSI) from onsite to offshore coupled with passing seasonal productivity commitment (concentrated on Mfg). Q2 would again have an adverse topline impact of 80bps (consolidated level) due to the JV divestment. Despite the fact, the management is confident of revenue growth both at consolidated level and in the Services segment in Q2. The management’s confidence is underpinned by earlier deal wins that have gone for executions, instead of building any optimism or constructive recovery on the discretionary spends. Additionally, the management anticipates sharp recovery within the ER&D space partly led by Q1 seasonal impact within Mfg and partly by anticipated growth recovery within ASAP after the Q1 trough. With underlying demand environment and clients’ sentiment towards discretionary spends continue to be at earlier pace, we are broadly keeping our revenue estimates unchanged. The Q1 margin weakness is likely to be compensated by an uptick in high-margin businesses (ER&D and P&P) in 2Q/3Q. We expect the company to report margins in the lower range of the guidance band (18-19%), as the anticipated fresher hiring (10k in FY25) would keep a tight band for utilization and productivity improvement.
Valuations and 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. Even if it delivers in the mid-range of the revenue guidance, it would end up achieving growth above the peer average. We are baking in USD revenue growth of 4.7% and 10% YoY with margin improvement of -20bps and 90bps for FY25E and FY26E, respectively. The stock is currently trading at 22.2x FY26E. We maintain “BUY” on HCL Tech assigning PE of 25x to FY26E with a target price of ₹1,800.