HCL Tech Q4FY22 review - Strong IT services revenue performance; margins better on low base

What’s Buzzing:

HCL Tech is guiding revenue growth of 12-14% in constant currency in FY23E while EBIT margins are expected to be in the 18-20% band.

Context:

HCL Tech reported a better-than-expected performance in IT services but a weak performance in P&P and E&RD business dragged the overall performance for the quarter. The company’s IT services grew 5.2% in CC terms, which was better than some its peers (Infosys 1.2%, TCS 3.2% QoQ etc). P&P business reported 24% QoQ revenue decline while ER&D reported 3.9% QoQ revenue growth. This resulted in revenue growth of 1.1% at the company level in CC while it was 1.2% QoQ in rupee terms. P&P business also acted as a drag on margins as EBIT margins declined 100 bps QoQ to 18% at the company level. Margins in IT services grew 85 bps QoQ on a low base since out of this 65 bps growth was on account of recovery in weak margins in the last quarter while 20 bps was due to benefit of operating efficiency. For FY22, the company reported revenue growth of 12.8% in dollar terms and 12.7% in CC terms vs. guidance of double digit CC growth in FY22). It reported EBIT margin of 18.9% for FY22, lower than guided range of 19-21%. The company declared a total dividend of Rs 44 per share for FY22 (88% payout, higher than 75% payout guided range)

Our Perspective:

The company’s revenue guidance appears strong and reflects strong demand outlook for the company. Revenue guidance is also a function of strong net new deal wins (renewals not included) for the company, which was at US$8.3 billion (bn), growing at 16% CAGR over FY20-22. On the margin side, like Infosys, it has cut margin guidance by 100 bps both on lower and upper end, which reflects costs pressure as well as possible muted performance of P&P business in FY23 (EBIT margins for this business declined 400 bps in FY22 vs. FY21). Unlike the cautious view of some its competitors in terms of near term headwinds, the company is more confident now vs. its earlier commentary, which would be taken positively, in our view. The company stand on minimum 75% of payout for FY22-26 stays as it is not looking for any inorganic opportunity in the near term. We estimate 11.8%, 11.1%, 8.7% CAGR growth in revenue, EBITDA, PAT, respectively, in FY22-24E.