- 14 Jan 2025
- ICICI Securities
ON EXPECTED LINES; SOME POSITIVE GREENSHOOTS AMID LIKELY SOFT Q4 OUTLOOK
News: HCLTech reported revenue of US$3,533 mn, up 2.5% QoQ & up 3.5% YoY (in CC terms up 3.8% QoQ & 4.1% YoY). The services business improved 2.2% sequentially and 4.9% YoY in CC terms. Sequential growth was led by the software segment which grew 18.7% QoQ in CC terms. The IT services and ER&D business reported a growth of 1.5% and 5.4% QoQ in CC terms respectively. Geography wise all geographies grew on a YoY basis in CC terms with Americas (65.5% of mix), ROW (6.3% of mix) and Europe (28.2% of mix) reporting a growth of 6.2%, 2.9% and 2.6% respectively. Segment wise on YoY basis in CC terms, growth was led by TMPE (12.3% of mix), Retail & CPG (10.6% of mix) and Tech & Services (13.3% of mix) which grew by 33.1%, 17.2%, & 7.6% respectively while Public Services (8.9% of mix), Financial Services (20.3% of mix) & Life Sciences & Healthcare (15.5% of the mix) declined by 4.6%, 1.4% & 1.1% respectively. EBIT margins came in at 19.5%, up 90 bps QoQ. However, IT & Business Services and ER&D margins contracted by ~22 bps wherein the productivity gains from their margin improvement plan of 100 bps & forex gains of 18 bps were offset by wage hike impact of 80 bps, 40 bps from furloughs and 20 bps from the HPE CTG acquisition including integration expense. PAT stood at ₹ 4,591 crore, up 8.4% QoQ. The company’s headcount increased by 2,134 employees bringing the total employee headcount to 2,20,755. The attrition further inched up by 30 bps YoY to 13.2%. HCLTech during the quarter won TCV of US$2.095 bn (down 5.5% QoQ & up 8.7% YoY). The management revised its revenue growth and services growth guidance for FY25 upwards to 4.5-5% YoY in CC terms (vs 3.5-5% earlier) 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 and a special dividend of ₹6 per share.
Views: The company reported broadly in line numbers with the street estimates, driven by its software segment, which continued to anchor quarterly performance. While the management revised FY25 revenue guidance upwards (bulk of which is HPE CTG acquisition induced), the organic growth outlook for FY25 remains unchanged. Enhanced ACV, a shift towards smaller-sized deals enabling faster revenue conversion, and minimal adverse impact from H1B visa issues, amid improved discretionary spends are expected to position HCLTech favorably in the medium to long term. However, management anticipates a soft Q4 in terms of margins and revenues, citing the ramp-down/reduction of a large/mega deal, delay in discretionary deal closures, and impact from the HPE CTG acquisition. We maintain a neutral stance on the company.
Impact: Neutral