HCLTECH: SOFT QUARTER; RECOVERY EXPECTED IN H2FY25

News: HCLTech reported revenue of US$ 3,364 mn, down 1.9% QoQ & up 5.1% YoY (in CC terms down 1.6% QoQ & up 5.6% YoY). In rupee terms it reported revenue of ₹28,057, down 1.6% QoQ & up 6.7% YoY. The services business declined 1.9% sequentially, up 5.8% YoY in CC terms, owing to to a large deal offshoring impact. Growth was led by the Software segment which grew 0.4% QoQ and 3.5% YoY in CC terms while the IT services and ER&D business declined by 1.5% and 3.5% QoQ in CC terms respectively. Geography wise on YoY basis in CC terms the growth was led by Americas (66% of mix) & Europe (27.9% of mix) which grew by 8% & 3% respectively while ROW (6.1% of mix) declined by 3.6%. Segment wise on YoY basis in CC terms, growth was led by TMPE – enabled by the Verizon deal (12.2% of mix), Retail & CPG (9.4% of mix), Manufacturing (19.4% of mix) and Tech & Services (13% of mix) which grew by 69.2%, 9.7%, 3.5% & 2.7% respectively while Lifesciences (15.% of mix), Public Services (9.1% of mix) and Financial Services (21% of mix) declined by 4.1%, 3.7% & 1.3% respectively. EBIT margin stood at 17.1%, down 50 bps QoQ. The company’s PAT margin stood at 15.2%, up 120 bps QoQ/180 bps YoY. The company’s headcount reduced by ~8K employees, largely due to the State Street JV exit, bringing the total employee headcount to 2,19,401. The attrition further declined by 40 bps QoQ/350 bps YoY to 12.8%. HCLTech during the quarter won TCV of US$ 1.96 bn (down 14% QoQ & up 25% YoY). The management for FY25 maintained its revenue growth guidance between 3-5% YoY in CC terms while the margins are expected to be within the previously guided margin band of 18-19%. The company declared an interim dividend of ₹12 per share.

Views: The company performance was in line with expectations of street due to Q1 being a seasonally soft quarter for the company. Software segment reported a strong QoQ growth while the ER&D segment declined primarily due to weak performance in the manufacturing and medtech segment. The deal wins during the quarter were soft, similar to peers, with no changes in the discretionary spending pattern as clients continue to focus on cost takeout deals. Although sequential growth is expected in Q2 (barring financial services which is expected to return to growth in Q3FY25), headwinds from the ASAP acquisition not contributing meaningfully to the topline along with an 80 bps impact from the State Street divestiture on the overall revenues continue to pose a challenge for the company.

Impact: Neutral