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HCL Tech Q1FY23 review: EBIT margin may struggle to hit lower end of guided band

ICICIdirect Research 13 Jul 2022 DISCLAIMER

What's Buzzing:

HCL Tech maintained revenue growth of 12-14% in constant currency in FY23E while the company is now hinting at the lower end of the margin band for FY23E.

Context:

The company reported 2%, 3.7%, 5.1% QoQ CC growth for the quarter for IT services, ER&D, P&P, respectively, while at the company level, it reported 2.7%QoQ CC growth. Dollar revenues grew 1.5% QoQ to US$3,038 million (mn) while rupee revenues grew 3.8% QoQ to Rs 23464 crore. Geography wise North America (64% of the mix), reported 2.8% QoQ CC growth while Europe’s growth in CC moderated to 1.6% QoQ. Vertical wise, in CC terms, technology & services, telecom & media and life sciences reported 10.9, 4.3% and 2.7% QoQ growth, respectively, while manufacturing, retail CPG and financial services reported weak performance of -1.4%, -0.5%, 0.8% QoQ, respectively. The company reported 180 bps QoQ margin decline in IT services due to i) (-100bps) impact on increase in subcontracting costs ii) (-50 bps) on increase in retention costs amid high attrition iii) (-35 bps) on increase in travel & visa costs while EBIT margins at the company level were down 90 bps QoQ. LTM attrition increased 190 bps QoQ to 23.8%. The company added 2,089 employees during the quarter taking its headcount to 210,966. TCV of new deal wins was at US$2054 mn ( +23.5% YoY, -9.1% QoQ).

Perspective:

The company has maintained revenue guidance for FY23 which is also based on continued strong TCV bookings trends (23% YoY growth). The demand commentary in its key geographies and verticals remained upbeat. It is not witnessing any slowdown there. Though fresher addition has been lower in Q1 i.e. 6000, it is expected to add 10,000 freshers in Q2FY23 and maintained its annual fresher hiring addition guidance of 30,000-35,000 for FY23. On the EBIT margin front, it is looking at few headwinds, going forward, such as continued higher attrition (expected to cool off only in H2FY23), wage hikes in Q2 and continued higher subcontracting costs especially in its seven new countries. In our assessment, the EBIT margin may struggle to hit even the lower end of the guidance band. Price hike may support margins in the near term but the company is yet to see any traction on that front, which is where probably TCS is outpacing HCL Tech. We estimate 12%, 8%, 5.2% revenue, EBITDA, PAT CAGR, respectively, over FY22-24E.

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