HCLTech reports a strong Q3

HCLTech Ltd. reported strong performance for the quarter. Both revenue and Ebit margin was above expectation; HCL software segment (12.3% of revenue) increased by 5.0% YoY in constant currency terms, while engineering research and development and IT services (88.2% of revenue) increased by 4.2% YoY in cc terms.

Telecommunication, media and entertainment vertical reported highest sequential growth at 25.9% QoQ in cc terms. The overall revenue increased by 6.0% QoQ in cc terms.

There was sequential improvement in Ebit margin (up 124 basis points QoQ) led by decrease in selling, general and administration. Employee attrition continues to moderate as last twelve months attrition was down 140 bps QoQ to 12.8%.

The near term demand environment remains challenging as the macroeconomic factors in the U.S. and Europe remain weak and that is reflected in clients being more watchful of the situation and consequently, that continues to impact near term revenue performance.

The decline in employee attrition and improving employee pyramid should support margin in FY24. We estimate revenue compound annual growth rate of 12.5% over FY23‐26E with average Ebit margin of 19.1%.

We maintain our ‘Add’ rating on the stock with revised target price of Rs 1,750/share at 21.0 times on FY26E earnings per share.

The stock trades at PER of 21.0 times/18.5 times on FY25E/FY26E EPS. Yes Securities