HCL TECH GUIDANCE REFLECTS PAIN IN DISCRETIONARY SPENDING; ONE OF KEY BENEFICIARIES OF VENDOR CONSOLIDATION

News: HCL Tech IT services (73.8% mix) revenues grew 1.6% in CC terms while dollar revenues were up 2.6% QoQ. ER&D services(16.1% mix), however, reported a decline of 3.8% in CC and 3.3% in US$  due to certain project ramp down by clients. The decline in ER&D was largely compensated by lower than expected decline in P&P business (10.2% mix) where it reported 14% QoQ decline due to seasonality. At the company level in US$ terms, it reported 0.3% QoQ decline. EBIT margins for IT services improved 30 bps QoQ to 17.1% while at company level EBIT margins declined by 150bps to 18.1%, due to decline in margins for P&P and ER&D. Geography wise North America ( 63.8% of the mix), reported 1.8% QoQ CC revenue growth while Europe (28.9% mix) reported a decline of 1.4% QoQ in CC.  Vertical wise, in CC terms, BFSI & Life sciences ( 21% and 17% mix respectively) reported growth of 6.1% and 2.1% QoQ while Manufacturing, Telecom & Media ( 19% and 8% mix) reported decline of 3.8% and 6.6% QoQ respectively. LTM attrition was down 220bps QoQ at 19.5%. The company added 3674 employees ( vs 2945 in Q3) during the quarter taking its headcount to 2,25,944

Views: The company’s performance for the quarter was largely in line considering some mix change of P&P and ER&D business during the quarter. The company achieved FY23 revenue guidance at the company level. Though It missed services revenue guidance for the year but it is noteworthy that guidance miss for HCL Tech was only 20 bps vs. 60 bps for Infosys, which reflects relatively resilient business footing in a challenging environment where it is flagging pain in discretionary spending. Revenue guidance for FY24 also looks strong compared to Infosys and the company is also guiding 70 bps currency tailwinds in addition to CC guidance making it even more strong i.e  6.7% to 8.7% at the company level and 7.2% to 9.2% at services levels. The company’s valuation discount vs. Infy historically has been around 20%. We believe with stronger growth as well as higher payout (87% vs. 60% for Infosys), the gap is likely to be narrowed in the medium term. EBIT margin guidance reflects some sticky costs in FY24 and P&P lumpiness but in line with peers commentary where they also do not expect accelerated margin expansion despite attrition moderation

Impact: Positive