HCLTech Q3 Results Review – Exceptional All-Round Performance: Motilal Oswal

NDTV Profit’s special research section collates quality and in-depth equity and economy research reports from across India’s top brokerages, asset managers and research agencies. These reports offer NDTV Profit’s subscribers an opportunity to expand their understanding of companies, sectors and the economy. NDTV Profit’s special research section collates quality and in-depth equity and economy research reports from across India’s top brokerages, asset managers and research agencies.

These reports offer NDTV Profit’s subscribers an opportunity to expand their understanding of companies, sectors and the economy. Motilal Oswal Report HCLTech Ltd. delivered a robust Q3 FY24 performance, with a 6.

0% QoQ revenue growth in constant currency terms, ahead of our estimate of +4. 4%. This growth was driven by seasonal gains in HCL Software (product and platform), which rose 34% QoQ.

HCLTech’s Services grew 3. 1% QoQ in CC terms (110 bp ahead of our estimate), with healthy growth in both the IT and ER&D verticals. The TCV was at $1.

9 billion, down from Q2’s high base of $4. 0 billion. HCLTech narrowed its FY24 USD revenue growth guidance to 5.

0%-5. 5% YoY in CC (versus 5. 0-6.

0% YoY earlier, including ASAP) for both consolidated and services segment. The Ebit margin also exceeded expectations at 19. 8% (+130 bp QoQ), led by HCL Software, which achieved 32.

9% margin. The services margin contracted 50 bp QoQ though. HCLTech retained its Ebit margin guidance band of 18-19%.

We were impressed by the strong beat on both services and P&P from the company, despite various macro headwinds that have led to a decline in growth among key competitors. More importantly, the implied Q4 guidance for the services vertical indicates that it will grow next quarter despite lower deal wins and a high base. This is in contrast with peers who have indicated a tough quarter led by macro challenges.

In our view, this should help HCLTech narrow the valuation gap with our coverage universe. HCL Software delivered strong growth, even adjusted for the seasonality. The organic growth of 5.

0% YoY was also one of the strongest performances it has delivered post-acquisition. With growth picking up in this business over the next two years, it can become a tailwind for the stock price. We forecast HCLTech to deliver an FY24 USD CC revenue growth at the midpoint of its guidance, which should help it report a revenue compound annual growth rate of 9.

8% over FY23-26. We project HCLTech to deliver an FY24 margin near the mid-point of its guidance, and further improve it to 19. 2% in FY26.

This should lead to an INR profit after tax CAGR of 12. 7% over FY23-26E. The strong growth guidance and margin performance in a weak demand environment should boost investor confidence on HCLTech’s business and reduce the valuation gap with larger tier-I peers.

HCLTech remains our top pick in the IT Services coverage for 2024. After the strong Q3 results and beat, we have raised our FY24-26E EPS by 3- 4%. We reiterate our ‘Buy’ rating with a target price of Rs 1,880, as we roll forward our price/earning-based valuation to FY26 and assign a multiple of 24 times.

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