Connect with us

Company News

HCL Technologies: Deja vu, ICICI Securities

HCLT’s results exhibited a similar theme as the last three quarters: strong services growth, margin performance impacted by weak Products business, and a healthy TCV. HCLT reported a miss on revenue growth at 1.1% QoQ CC (vs Isec: +1.5%). Miss was on account of 24% QoQ CC decline in Products and Platforms but Services (ITBS and ERS) posted strong growth of 5% QoQ CC. We would like to highlight that since last three quarters, Services business has consistently grown organically at 5.0% CC QoQ or higher (highest amongst Tier-I). Among Services, IT services posted strong growth of 5.2% QoQ and ER&D posted 4% QoQ CC growth. Q1 is a seasonally weak quarter because of pass-through of productivity benefits and HCLT expects Q1FY23 to be no different. HCLT has guided for 12-14 YoY CC growth for FY23, and we expect revenue growth of 13%/12.3% YoY USD in FY23/24.

On P&P business, management mentioned 20 products have high growth potential and large market opportunities. HCLT will continue investing in these products (HCLT invests $200mn every year in P&P R&D). These will become the bed-rock of P&P growth going forward. Total revenue of P&P segment is at $1.4bn and 73% of the revenue (non-licence) is stable and growing, while 27% of the business is volatile based on quarterly booking. Subscription-support services, Professional services and Product and license sales account for 67%, 5% and 28% of revenue.

Product and license sales are a volatile component and revenue recognition depends on quarterly bookings. HCLT’s focus is to convert this stream of revenue into subscription-based model. Many of these products are already available in SAAS versions, which will reduce quarterly volatility of P&P segment going forward. We continue to believe that Products business has low growth characteristics; hence, we model a revenue decline over the next two years.

HCLT reported EBIT margins at 17.9%(-110bps QoQ) vs our estimate of 18.5%. Margin decline was on account of lower mix of P&P revenue. IT services margins expanded 90bps QoQ to 17.5% and ER&D services margins rose 50bps QoQ to 19.1%. HCLT has guided for EBIT margin range at 18-20%(in line with our estimates) for FY23, below its earlier guidance of 19-21%. We are estimating EBIT margins at the lower end of the guidance at 18% in FY23 and 19% in FY24. Our EPS estimates get reduced by 3%/1% for FY23/24 on account of cut in margin estimates. HCLT trades at 21x/18x PE on EPS of Rs.52/61 for FY23/24. HCLT’s pre-covid (FY18-20) average PE multiple stands at 13.4x vs 20x avg. PE multiple for FY20-24 – a premium of 43% but EPS CAGR stands at 12% for FY22-24 vs 14% for FY18-20. We do believe that HCLT’s underperformance in growth and margins w.r.t. to peers will continue, but risk-reward looks favourable to us.

  • Revenue below estimates. Revenue for the quarter was at US$2993mn (+1.1% QoQ CC) below consensus of 1.5% QoQ CC. Services business (IT services + ER&D) grew 5% QoQ CC, while Products & Platforms (P&P) segment declined 24% QoQ CC due to seasonality. Services segment has consistently grown at 5%+ QoQ (CC) CQGR (highest among Tier-1) on the back of strong momentum in digital, cloud and engineering services.

Growth was led by Europe (+2.4% QoQ) and RoW (+3.5% QoQ). In terms of verticals, growth was led by Communication (+6.8% QoQ), Manufacturing (+4.3% QoQ), Lifesciences (+4.1% QoQ) and Public services (+3.2% QoQ).

  • Healthy deal wins. Company reported new deal TCV of US$2.3b, +6% QoQ but declining 27% YoY on a high base. Services TCV was at US$2.2bn (6 net new deals) while Products TCV was at US$54mn (4 net new deals).

Deal pipeline has a good mix of transformation deals and healthy mix of large and small deals as well. The pipeline is strong across geographies.

  • Strong demand environment. Demand for digital services continues to be strong, and is particularly high for cloud adoption services, agility, modernising applications for SAAS, data and analytics, operating model transformation (dev-ops and intelligent transformation) and cyber security. Clients in the telecom vertical are investing in 5G and telecom modernisation. In Q4FY22, HCLT launched two new 5G applications.
  • Within Lifesciences, clients are investing in remote patient monitoring devices (like BP monitoring). For manufacturing clients, HCLT launched “M vision” a framework to migrate the legacy firms to next-generation enterprises to make the organisation resilient.
  • Services segment outlook. Management expects Q1FY23 to be seasonally weak given absence of pass-through productivity benefits. In the last six months, HCLT has increased focus on cross selling services to P&P clients and is witnessing good synergies between its services and P&P business. HCLT has already seen few RFPs which would not have been possible otherwise. P&P clients now contribute 10% of the deal pipeline.

Growth in ER&D is being driven by 5G, telecom modernisation and industry 4.0. Acquisition of Starschema should further add to HCLT’s data engineering capabilities.

  • P&P segment outlook. HCLT invests $200mn every year in P&P R&D. It will continue to invest in 20 products which have high growth potential and large market opportunities. These should help propel P&P growth going forward. Further, company has invested to modernise “Unico” and “Commerce”.

Of total revenues, 67% is subscription based, 5% is professional services around products and balance is license sales which is causes lumpiness in the business. HCLT’s focus is to convert this stream of revenue into subscription-based model. Many of these products are already available in SAAS versions, which will reduce the quarterly volatility of the P&P segment going forward. This is a multiyear journey and HCLT is at the start of this journey.

For the complete report click here – https://www.communicationstoday.co.in/hcl-technologies-deja-vu-icici-securities/

CT Bureau

Click to comment

You must be logged in to post a comment Login

Leave a Reply

Copyright © 2024 Communications Today

error: Content is protected !!