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HCL Technologies Ltd>
  • CMP : 956.4 Chg : -5.95 (-0.62%)
  • Target : 1,220.0 (10.81%)
  • Target Period : 12-18 Month

24 Apr 2022

Guidance of 12-14% CC growth in FY23

About The Stock

HCL Technologies (HCLT) offers IT, ER&D and products to BFSI, retail, health, telecommunication, manufacturing, media & hi-tech verticals.

  • HCL Tech has 250 Fortune 500 and 650 global 2000 clients
  • It has grown organically and inorganically (13% CAGR over FY17-22)

HCLT reported strong growth in IT services.

  • Revenue in IT services grew 5.2% QoQ in CC terms. That of P&P declined 24% QoQ in CC terms
  • EBIT margin of services business was up 80 bps QoQ
  • Dividend for FY22 at ₹44 per share (88% pay out)
What should Investors do?

HCLT’s share price has grown by ~2.9x over the past five years (from ~₹ 376 in April 2017 to ~₹ 1,101 levels in April 2022).

  • We maintain HOLD rating
Target Price and Valuation

We value HCLT at ₹ 1220 i.e. 22x P/E on FY24E EPS

Key Triggers for future price performance
  • The company continues to win multiyear deals in Cloud transformation, cyber security, etc as new deal bookings continue to be strong
  • Guided for 12-14% revenue growth in CC for FY23E, mainly led by improved growth in IT & business services and ER&D
  • However, margins are expected to be under pressure for a few more quarters. We expect ~130 bps EBIT margin decline over FY22-24E
  • With improvement in large deal wins, expansion in geographies, investment in sales & capabilities, we expect HCLT to register 12.9% CAGR in FY22-24E
Alternate Stock Ideas

Apart from HCLT, in our IT coverage we also like TechM.

  • Key beneficiary of uptick communication spend
  • BUY with target price of ₹ 1,850

Key Financial Summary

Particulars FY19 FY20 FY21 FY22 5 Year CAGR(FY17-FY22) FY23E FY24E 2 Year CAGR (FY22-FY24E)
Net Sales 60,427.0 70,678.0 75,379.0 85,651.0 12.9 98,555.2 108,903.5 12.8
EBITDA 13,968.0 16,694.0 19,481.5 20,041.0 14.2 21,514.6 23,468.7 8.2
EBITDA Margins (%) 23.1 23.6 25.8 23.4 - 21.8 21.6 -
Net Profit 10,122.0 11,062.0 12,434.5 13,516.0 9.8 13,927.1 15,031.0 5.5
EPS (|) 37.3 40.8 45.8 49.8 - 51.4 55.4 -
P/E 29.5 27.0 24.0 22.1 - 21.4 19.9 -
RoNW (%) 24.5 21.6 20.8 21.8 - 21.3 22.0 -
RoCE (%) 26.9 23.0 23.5 24.2 - 25.2 26.1 -
Source: Company, ICICI Direct Research

Key takeaways of recent quarter & conference call highlights

  • Reported term: It reported rupee revenues of | 22,597 crore, up 1.2% QoQ, 15% YoY while dollar revenues came in at US$2,993 million (mn), up 0.5% QoQ, 11% YoY. IT business reported 4.6% QoQ to US$2,199 mn while ER&D business reported revenues of US$490 mn, up 3.6% QoQ. P&P business reported decline of 24.4% QoQ to US$304 mn


  • In CC terms: The company reported 1.1% QoQ revenue growth. IT business reported 5.2% QoQ growth while ER&D reported growth of 3.9% QoQ. P&P business reported decline of 24% QoQ. The company is guiding 12-14% revenue growth in FY23


  • Vertical wise, in CC terms, Telecommunications, Manufacturing, life sciences have reported strong growth of 6.8%, 4.3%, 4.1% while BFSI, Retail, Technology & services reported weak growth of +0.4%, -5.6%, -3.8% QoQ, respectively. Geography wise America, Europe reported relatively weak growth of 0.2%, 2.3% QoQ, respectively


  • At the company level, it reported EBIT margin decline 110 bps QoQ to 17.9% while services margin (IT+ER&D) declined 80 bps. The company indicated that out of these 80 bps, 60 bps was due to recovery of furlough impact last quarter while 20 bps was due to operating efficiency. The company is guiding 18-20% EBIT margin for FY23. The company indicated that salary hikes in FY23 would be higher than that of FY22


  • HCLT remains confident on the demand environment and do not see any near term headwinds as far as the demand is concerned. The company order book (net new deals) remains strong at US$2.2 billion (bn) for Q4 while that of FY22 was at US$8.3 bn (~16% CAGR in FY20-22)


  • The company declared dividend of | 18 per share while total dividend for FY22 was at | 44 per share i.e. dividend payout of 88%, which is higher than their guided number. The company earlier guided for minimum 75% dividend payout for FY22-26. The company reiterated that guidance since they are not looking at any near term acquisitions
  • HCLT is looking to continue its investments in P&P business. It invests US$200 mn per year into R&D for this business. The company’s portfolio includes 20 products, which have high growth market opportunities as per management. HCLT also indicated that revenue mix of this business is as follows: 67% of the revenue comes from subscription, 5% from professional services and rest from license sales. It also indicated that as licensing pie will go down and subscription pie will grow as per their plan and hence lumpiness in revenue will come down
  • HCLT saw an addition of 11,100 employees in Q4FY22, taking its overall full-time employee headcount to 208,877. Attrition increased 210 bps QoQ to 21.9%
  • The company indicated that it is pushing for better pricing and some of the new/niche deals are coming with a better pricing. However, it maintained that pricing increase would be gradual in nature
Variance Analysis
   Q4FY22   Q4FY22E   Q4FY21   YoY (%)   Q3FY22   QoQ (%)  Comments
Revenue 22,597 22,781 19,642 15.0 22,331 1.2 Revenue was up 1.2% QoQ, IT services business grew by 5.2% QoQ in CC while P&P business declined 24% QoQ in CC
Cost of sales (including 14,672 14,716 12,650 16.0 14,309 2.5  
employee expenses)              
Gross Margin 7,925 8,064 6,992 13.3 8,022 -1.2  
Gross margin (%) 35.1 35.4 35.6 -53 bps 35.9 -85 bps  
Selling & marketing costs 2,872 2,848 2,470 16.3 2,780 3.3  
EBITDA 5,053 5,217 4,522 11.7 5,242 -3.6  
EBITDA Margin (%) 22.4 22.9 23.0 -66 bps 23.5 -111 bps  
Depreciation 984 1,071 1,117 -11.9 991 -0.7  
EBIT 4,069 4,146 3,405 19.5 4,251 -4.3  
EBIT Margin (%) 18.0 18.2 17.3 67 bps 19.0 -103 bps EBIT margin of services business ( IT sevices and ER&D together) impoved by 80bps QoQ due to base impact
Other income 252 193 190 NA 203 24.1  
PBT 4,321 4,339 3,595 20.2 4,454 -3.0  
Tax paid 721 998 1,191 -39.5 997 -27.7 PAT was higher due to lower tax expenses 
PAT 3,594 3,327 2,387 50.6 3,443 4.4  

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