HCL Tech Q1 – Demand moderation leads result miss, guidance retained

HCL Technologies Ltd.’s revenues declined by 1.3% QoQ in constant currency terms (our estimate: +1.7%), due to demand moderation in technology and telco media verticals. IT services, engineering research and development, and software declined 0.1%/5.2%/3.1% QoQ respectively. 

Operating profit margin dipped 110 basis points QoQ to 17% (our estimate: 18.3%) due to lower utilisation. Confidence of deal conversion and pick-up in remaining quarters led to management retaining FY24 guidance of 6-8% CC growth with OPM of 18-19%.

Q1 saw miss, but sharp cost containment efforts should help HCL Tech achieve its in-line margin objectives despite revenue pressures.

Dividend: Announced dividend of Rs 10 during the quarter.

What to expect next quarter
We expect improved sequential growth trajectory in Q2 led by IT services and ER&D segments at 3.0% and 2.4% respectively. Expect margins to improve by 56 bps QoQ, led by operating leverage, and absence of larger quantum of wage hikes pertaining to E4 and leadership.

Valuation
We expect that macro volatility will continue to weigh in on IT services for near future, and thereby moderating revenue momentum. We expect HCL Tech to deliver moderate revenue momentum over next two-four quarters (translating into mid-single digit revenue growth in FY23- FY25E) and expect it to sustain current valuations of 16 times-19 times which implies ~two times on price/earnings to growth basis.

We currently value HCL Tech at 18 times on FY25E earnings of Rs 63.2 with target price of Rs. 1,140 per share and maintain our ‘Reduce’ rating on the stock. Bloomberg