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HCL Tech Q2FY23 review - IT services growth guidance for FY23 stronger than Infosys

ICICIdirect Research 17 Oct 2022 DISCLAIMER

What's Buzzing 

HCL Tech has given IT services growth guidance for the first time, guiding for 16-17% growth in CC for FY23. Company level revenue guidance also increased to 13.5-14.5% while EBIT margin guidance of narrowed to 18-19% (from earlier 18-20%) for FY23. 

Context 

IT services revenues (74% mix) grew 5.3%in CC terms while ER&D revenues (17% mix) grew 5% in CC. P&P business (~10%mix), as expected, down 7.8% QoQ due to seasonality in licensing revenues. Dollar revenues for IT services were up 3.1% QoQ at US$2,268 million (mn) (cross currency headwinds of 220 bps) while at company level, dollar revenues grew 1.9% to US$3,082 mn. EBIT margins for IT services improved 100 bps QoQ to 16.7%, led by operating leverage, pricing benefits while company level EBIT margins improved 93 bps to 18%. Geography wise North America (65% of the mix), reported 4.7% QoQ CC growth while Europe’s growth in CC was also stronger at 6.9% QoQ. Vertical wise, in CC terms, manufacturing, lifesciences, telecom/media and financial services reported 10.9%, 5.1%, 4.1% and 3.7% QoQ, respectively. LTM attrition was flat QoQ at 23.8%. The company added 8359 employees (vs. 2089 in Q1) during the quarter taking its headcount to 219,325. TCV (new deal wins) was up 16% QoQ and 6% YoY to US$2,384 mn. 

Our Perspective 

HCL Tech's IT services growth guidance is stronger than Infosys for F23. On the demand side, it is not seeing any slowdown on tech spending as clients continue to spend on both revenue enhancements as well cost optimisation programs. The company has reported strong growth in IT services (four out of last five quarters, it has reported 5%+ CC QoQ growth) driven by continued strong order book. The company aspires to win TCV of US$2-2.5 bn every quarter, which is expected to provide revenue visibility ahead. It has been chasing clients from the last five quarters for price increase, yielding results as it has taken price hike on all existing as well new contracts since January 2022. This, along with easing of attrition, moderation of subcontractor costs, utilisation is expected to help it to achieve margins in the guidance band. We estimate 11.8%, 9.2%, 7.5% revenue, EBITDA, PAT CAGR, respectively, over FY22-25E.

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