HCL Technologies – Q3FY22 first cut, ICICI Securities

HCL Tech’s revenue performance in services business (proxy to IT peers) for the quarter was in line but the margin performance was weakest amongst them. Total revenues at the company level (including product business) increased 7.6% QoQ in constant currency terms while dollar/rupee revenue grew by 8.1%/6.7% QoQ , largely aided by growth across business verticals and geographies and some revival of product business which was weak last quarter. EBITDA/EBIT margins at the company level were flat for the quarter on sequential basis while EBIT margins for services business (proxy to IT peers) dip 190bps QoQ due to salary hikes, retention related costs etc.

Vertical wise, financial services/ manufacturing/Technology & Services/Retail CPG/Telecom Media grew by 6.3%/5.7%/14%/11.5%/11.3% in CC terms. Geography wise Americas/Europe/RoW grew 7.3%/9.1%/4.5% in CC term. The company witnessed strong client addition across all categories. On YoY basis, $50 mn+ clients up by 11, $20 mn+ clients up by 13, $10 mn+ clients up by 25, and $5 mn+ clients up by 34, $1 mn+ cients up by 50. TCV of new deal wins stands at of US$2,135 million (a growth of 64% YoY).

In terms of guidance the company has reiterated its double digits’ revenue guidance in constant currency for FY22E and expects EBIT margin to be between 19.0% and 21.0% for FY22E.

Q3FY22 earnings summary

• Revenues at company level in constant currency grew by 7.6% QoQ while US$ revenues increased by 6.7% QoQ to $2,978 million (vs our estimate of 3% growth). Revenues in rupees has risen by 8.1% QoQ to | 22,331 crore (vs. our estimate of 21,529 crore)
• EBIT margins at the company level were flat QoQ to 19% (vs our estimate of 19.2%), while services business EBIT margins declined by 190 bps, impacted by (-80bps) due to salary hike, (-65bps seasonal costs due to furlough), (-40bps) due to new customer, knowledge transfer costs, (-85bps employee retention, higher bonus related costs, which were mitigated by (+60bps) due to operating efficiency and (+20bps) currency related tailwinds
• PAT increased 5.5% QoQ to | 3264 crore (vs our estimate of | 3,343 crore) due to lower than expected operating performance
• The company declared an interim dividend of |10 per share.
• In terms of guidance the company expects to grow in double digits in constant currency for FY22E and expects EBIT margin to be between 19.0% and 21.0% for FY22E

EBIT margin performance for IT services was weak and management expects that apart from seasonal costs, other impacts would continue for near term and hence expects margins to be at the lower end of the guidance band. The company looking to double fresher hiring in FY23E which might provide some relief to supply side challenges and related costs.

CT Bureau