loader2
Login Open ICICI 3-in-1 Account
Open ICICI 3-in-1 Account
  • CMP : 1,673.2 Chg : 0.80 (0.05%)
  • Target : 1,050.0 (13.15%)
  • Target Period : 12-18 Month
Result Update

14 Jul 2022

Margins may struggle to hit lower end of band…

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)
Q1FY23 Results

HCLT reported weak margins.

  • The company reported 2.7% QoQ in CC terms, IT services grew 2.0% QoQ in CC terms while P&P grew 5.1% QoQ in CC terms
  • EBIT margin of IT services was down 180 bps QoQ while that of the company declined 90 bps
  • TCV grew 23.4% on a YoY basis
What should investors do?

HCLT’s share price has grown by ~2.2x over the past five years (from ~₹ 427 in July 2017 to ~₹ 928 levels in July 2022).

We maintain HOLD rating

Target Price and Valuation

We value HCLT at ₹ 1050 i.e. 19x 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
  • Maintains revenue guidance of 12-14% revenue growth in CC for FY23E and EBIT margin of 18-20%. However, now it has guided at the lower end of the band of 18% for EBIT margin
  • Revival of P&P business is critical as it is a high margin business
  • With improvement in large deal wins, expansion in geographies, investment in sales & capabilities, we expect HCLT to register 12.0% CAGR in FY22-24E
Alternate Stock Idea

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

  • Key beneficiary of uptick communication spend
  • BUY with target price of ₹ 1,190

Particulars

Particulars (₹ crore) Amount
Market Capitalization 454,050.4
Total Debt 3,923.0
Cash & Equivalents 18,875.0
EV 236,725.7
52 week H/L (₹) 2,012.2/1,302.8
Equity Capital 543.0
Face Value (₹) 2.0

Price Chart

Recent Event & Key risks

  • Revenue & EBIT margin guidance intact
  • Key Risks: (i) Lower than expected employee costs ii) Deteriorating TCV

Research Analyst

Sameer Pardikar
sameer.pardikar@icicisecurities.com

Result Update
ICICI Securities – Retail Equity Research

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 97,726.3 107,498.9 12.0
EBITDA 13,968.0 16,694.0 19,481.5 20,041.0 14.2 21,206.6 23,381.0 8.0
Margins (%) 23.1 23.6 25.8 23.4 - 21.7 21.8 -
Net Profit 10,122.0 11,062.0 12,434.5 13,516.0 9.8 13,694.6 14,964.8 5.2
EPS (|) 37.3 40.8 45.8 49.8 - 50.5 55.2 -
P/E 24.9 22.8 20.3 18.6 - 18.4 16.8 -
RoNW (%) 24.5 21.6 20.8 21.8 - 21.0 21.9 -
RoCE (%) 26.9 23.0 23.5 24.2 - 24.8 26.0 -
Source: Company, ICICI Direct Research

Key takeaways of recent quarter & conference call highlights

  • Reported term: It reported rupee revenues of | 23,464 crore, up 3.8% QoQ, 16.9% YoY while dollar revenues came in at US$3,038 million (mn), up 1.5% QoQ, 11.7% YoY. IT business reported increased 0.1% QoQ to US$2,201 mn, ER&D business reported revenues of US$503 mn, up 2.7% QoQ & P&P business reported revenue of US$334 mn, up 9.9% QoQ

 

  • In CC terms: The company reported 2.7% QoQ revenue growth. IT business reported 2% QoQ growth, ER&D reported growth of 3.7% QoQ & P&P business reported growth of 5.1% QoQ. The company maintained guidance of 12-14% revenue growth in FY23

 

  • Vertical wise, in CC terms, technology & services, telecommunications, manufacturing, life sciences reported strong growth of 10.9%, 4.3%, 2.7%, respectively, while BFSI, retail & manufacturing reported weak/muted growth of +0.8%, -1.4%, -0.5% QoQ, respectively. Geography wise America, Europe reported relatively weak growth of 2.8%, 1.6% QoQ, respectively

 

  • At the company level, it reported EBIT margin decline of ~90 bps QoQ to 17%. IT services margin declined ~180 bps. The company indicated that out of these -100 bps was due to higher sub-contractors cost, -50 bps was due to increased retention cost amid high attrition and -35 bps due to increase in travel & visa cost. The company maintains its guidance 18-20% EBIT margin for FY23 but has indicated that margins could be at the lower end of its guidance of 18%. We believe the company may struggle to even hit lower end of the margin guidance considering wage hikes in Q2 and continued increase in attrition as well as subcontracting costs

 

  • PAT of the company declined 8.9% QoQ to | 3,281 crore. The company mentioned that the tax expenses increased compared to previous years due to increase in tax rate of SEZ units in India

 

  • The company indicated that it has baked in some price increase in EBIT margin guidance from Q1 onwards. However, it did not get any price hike in Q1 and is now hopeful of getting it from Q2 onwards as client’s response was positive on the same citing demand supply mismatch

 

  • HCLT remains confident on the demand environment with new TCV deal wins of US$2 billion (bn), up 23.4% YoY of which US$1.9 bn. was in services segment & US$104 mn was in P&P. The company won 16 new large deals of which 7seven were in services and 9 in P&P. HCLT, so far, did not see any slowdown in tech spending from the clients
 
  • HCLT saw net addition of 2,089 employees taking its overall full-time employee headcount to 210,966. The company hired ~ 6,000 freshers in the quarter ended and plans to hire 10,000 freshers in Q2FY23 with the overall target of 30,000-35,000 of fresher hiring. LTM attrition of the company increased 190 bps to 23.8%. The company indicated that attrition will continue to be high in the next quarter and expects to moderate only in H2FY23. The company also indicated that it is taking a little more time for freshers to become billable. It is working on the strategy to improve the same for incoming freshers for the rest of the year
 
  • The company declared an interim dividend of | 10 per share
 
Variance Analysis
 
   Q1FY23   Q1FY23E   Q1FY22   YoY (%)   Q4FY22   QoQ (%)  Comments
Revenue 23,464 23,423 20,068 16.9 22,597 3.8 Revenue up 2.7% QoQ in CC, P&P business reported 5.1% CC growth while IT services reported 2% QoQ CC growth
Cost of sales (including 15,457 15,365 12,593 22.7 14,672 5.4  
employee expenses)              
Gross Margin 8,007 8,057 7,475 7.1 7,925 1.0  
Gross margin (%) 34.1 34.4 37.2 -312 bps 35.1 -95 bps  
Selling & marketing costs 3,032 3,045 2,567 18.1 2,872 5.6  
               
EBITDA 4,975 5,012 4,908 1.4 5,053 -1.5  
EBITDA Margin (%) 21.2 21.4 24.5 -325 bps 22.4 -116 bps  
Depreciation 983 1,007 977 0.6 984 -0.1  
EBIT 3,992 4,005 3,931 1.6 4,069 -1.9  
EBIT Margin (%) 17.0 17.1 19.6 -258 bps 18.0 -99 bps EBIT margin for IT services down 180 bps QoQ due to impact of 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 
Other income 345 252 194 NA 252 36.9  
PBT 4,337 4,257 4,125 5.1 4,321 0.4  
Tax paid 1,056 937 894 18.1 721 46.5 PAT lower due to weak operating performance and higher tax due to some units moving to higher tax bracket
PAT 3,283 3,311 3,215 2.1 3,594 -8.7  

Disclaimer

ANALYST CERTIFICATION

I/We, Sameer Pardikar, MBA, Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. It is also confirmed that above mentioned Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months and do not serve as an officer, director or employee of the companies mentioned in the report.

Terms & conditions and other disclosures:

ICICI Securities Limited (ICICI Securities) is a full-service, integrated investment banking and is, inter alia, engaged in the business of stock brokering and distribution of financial products.

ICICI Securities is Sebi registered stock broker, merchant banker, investment adviser, portfolio manager and Research Analyst. ICICI Securities is registered with Insurance Regulatory Development Authority of India Limited (IRDAI) as a composite corporate agent and with PFRDA as a Point of Presence. ICICI Securities Limited Research Analyst SEBI Registration Number – INH000000990. ICICI Securities Limited SEBI Registration is INZ000183631 for stock broker. ICICI Securities is a subsidiary of ICICI Bank which is India’s largest private sector bank and has its various subsidiaries engaged in businesses of housing finance, asset management, life insurance, general insurance, venture capital fund management, etc. (“associates”), the details in respect of which are available on www.icicibank.com. 

ICICI Securities is one of the leading merchant bankers/ underwriters of securities and participate in virtually all securities trading markets in India. We and our associates might have investment banking and other business relationship with a significant percentage of companies covered by our Investment Research Department. ICICI Securities and its analysts, persons reporting to analysts and their relatives are generally prohibited from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. 

Recommendation in reports based on technical and derivative analysis centre on studying charts of a stocks price movement, outstanding positions, trading volume etc as opposed to focusing on a companys fundamentals and, as such, may not match with the recommendation in fundamental reports. Investors may visit icicidirect.com to view the Fundamental and Technical Research Reports. 

Our proprietary trading and investment businesses may make investment decisions that are inconsistent with the recommendations expressed herein. 

ICICI Securities Limited has two independent equity research groups: Institutional Research and Retail Research. This report has been prepared by the Retail Research. The views and opinions expressed in this document may or may not match or may be contrary with the views, estimates, rating, and target price of the Institutional Research. 

The information and opinions in this report have been prepared by ICICI Securities and are subject to change without any notice. The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of ICICI Securities. While we would endeavour to update the information herein on a reasonable basis, ICICI Securities is under no obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that may prevent ICICI Securities from doing so. Non-rated securities indicate that rating on a particular security has been suspended temporarily and such suspension is in compliance with applicable regulations and/or ICICI Securities policies, in circumstances where ICICI Securities might be acting in an advisory capacity to this company, or in certain other circumstances. 

This report is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. This report and information herein is solely for informational purpose and shall not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. ICICI Securities will not treat recipients as customers by virtue of their receiving this report. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. The recipient should independently evaluate the investment risks. The value and return on investment may vary because of changes in interest rates, foreign exchange rates or any other reason. ICICI Securities accepts no liabilities whatsoever for any loss or damage of any kind arising out of the use of this report. Past performance is not necessarily a guide to future performance. Investors are advised to see Risk Disclosure Document to understand the risks associated before investing in the securities markets. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to change without notice. 

ICICI Securities or its associates might have managed or co-managed public offering of securities for the subject company or might have been mandated by the subject company for any other assignment in the past twelve months. 

ICICI Securities or its associates might have received any compensation from the companies mentioned in the report during the period preceding twelve months from the date of this report for services in respect of managing or co-managing public offerings, corporate finance, investment banking or merchant banking, brokerage services or other advisory service in a merger or specific transaction. 

ICICI Securities or its associates might have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the companies mentioned in the report in the past twelve months. 

ICICI Securities encourages independence in research report preparation and strives to minimize conflict in preparation of research report. ICICI Securities or its associates or its analysts did not receive any compensation or other benefits from the companies mentioned in the report or third party in connection with preparation of the research report. Accordingly, neither ICICI Securities nor Research Analysts and their relatives have any material conflict of interest at the time of publication of this report. 

Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions. 

ICICI Securities or its subsidiaries collectively or Research Analysts or their relatives do not own 1% or more of the equity securities of the Company mentioned in the report as of the last day of the month preceding the publication of the research report. 

RATING RATIONALE

ICICI Direct endeavours to provide objective opinions and recommendations. ICICI Direct assigns ratings to its stocks according -to their notional target price vs. current market price and then categorizes them as Buy, Hold, Reduce and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts valuation for a stock

Buy: >15%

Hold: -5%to 15%;

Reduce: -15% to -5%;

Sell: <-15% 

Pankaj Pandey

Head – Research

pankaj.pandey@icicisecurities.com

 

 

ICICI Direct Research Desk,

ICICI Securities Limited,

1st Floor, Akruti Trade Centre,

Road No 7, MIDC,

Andheri (East)

Mumbai – 400 093

 

 

research@icicidirect.com
Read More
✕
Application status