Result Analysis -HCT Tech

Result Highlight: 

• HCL Tech Consolidated Revenue rose 11% QoQ and 15.69% YoY to ₹ 22331 crore – inline with the estimate. Other income rose 6.25% QoQ to ₹255 Crore.

• EBITDA Margin contracted to 47% from 28.2% same quarter last year due to wage hike.

• Net profit decline 13.65% YoY to ₹3442 crore for the December quarter compared with ₹ 3982 crore in the same quarter last Reported strong Cash flow of ₹ 584.3 Cr in Q3.

• Attrition rate continues to be very high at 19.3%.

• All Verticals Grow 10%+ YoY; Product and Platform saw the highest growth of 20.83%.

• All major markets showed strong growth, with growth led by America (+17.38%). Europe (+42.21%), India saw degrowth (-21.56%).

• Strong Booking performance: TCV of New Deal wins at US$ 2,135 mn registering 64% YoY growth. Services TCV at US$ 1,968 mn (63% YoY) enabled by 8 net new large Services deal wins; Products TCV at US$ 167 mn (70% YoY) enabled by 8 net new large Product deal wins; Significant number of small deals.

• HCL is acquiring 100% stake in Starschema, a limited liability company incorporated in Hungary for total cash consideration of US$ 42.5 mn. With this acquisition, HCL would enhance its capabilities and solutions in Data Engineering which will accelerate the growth of Mode 2 services in Digital Engineering, Near-shore Eastern European presence and ability to scale. The transaction is expected to be closed by March 2022.

• HCL announced the acquisition of 51% equity stake in the German IT consulting company, Gesellschaft für Banksysteme GmbH (gbs), along with apoBank, who would hold the balance 49% of equity. The strategic partnership would drive digital transformation and innovation for German financial services sector. HCL has paid Euro 99,000 as the purchase consideration for its 51% stake. The transaction has been completed with effect from January 5th, 2022

• The company has declared a dividend of ₹ 10 /- per share for Q3

Management commentary:

• C Vijayakumar, Chief Executive Officer & Managing Director, the company said “We have delivered all round stellar performance this quarter with a revenue growth of 7.6% in constant currency QoQ, the highest recorded in the last 46 quarters. Our Products & Platforms segment led the growth with 24.5% followed by Engineering and R&D Services with 8.3% and IT & Business Services with 4.7%, all in QoQ cc. Our future looks bright as we had a very strong net new booking of $ 2.1B, a 64% YoY increase. We also added more than 10,000 to our employee strength this quarter. I believe we continue to be in a vantage position to address sustained demand momentum as our investments on strategic priorities like digital, cloud & engineering capabilities and our talent development plans are showing strong returns.”,

• This was clearly a quarter of record growth. Revenue achievement was at $ 2,977 Mn, up 7.6% QoQ & 15.0% YoY in constant currency. Profitability was maintained at EBITDA of 24.2% and EBIT of 19.1% (both Ind AS). Net Income Margin for the quarter was 15.4%. Free Cash Flow (FCF) increased 33.7% QoQ at $ 521 Mn, 114% of Net Income. LTM FCF is at 102% of Net Income. We closed the quarter with Gross Cash at $ 2.7 Bn and Net Cash at $ 2.1 Bn, despite higher dividend payout, purchase of shares by the RSU Trust and acquisition of balance shareholding in Actian during the quarter.”, said Prateek Aggarwal, Chief Financial Officer, HCL Technologies Ltd.

• Guidance: Revenue expected to grow in double digits in constant currency for FY’22. EBIT margin expected to be between 19% and 21% for FY’22.

• The management reiterated double digit revenue guidance for FY22 and 19- 21% EBIT margin for FY22. The company indicated that 65 bps margin impact for the quarter (due to seasonal leaves) would not be recurring in nature but other factors may continue to impact for few quarters. Due to this, HCLT expects EBIT margins to be at the lower end of the guided range

• The company continued to hire freshers to cater to the increasing demand. It added 5,000 freshers in Q3 over and above 5,500 freshers in Q2 and 3,500 in Q1. The company has guided for 20,000 fresher hiring for FY22E.

 OUTLOOK

HCL Tech Q3FY22 result was inline on all front, Revenue grew 15.69% and Profit degrowth came in at -13.56% on YoY basis , EBIT margin decline was 300 basis point YoY basis but improved QoQ basis despite multiple headwind of wage revision The Deal value of the company is broad based across markets and verticals with $2135 million in this quarter. HCL Tech services attrition rate still continues to be high but lower than the industry.As demand environment continues to be strong with deal pipeline increasing every quarter, HCL tech Revenue expected to grow in double digits in constant currency for FY’22. EBIT margin expected to be between 19% and 21% for FY’22.. At the CMP of ₹1337, HCL Tech is trading at PE multiple of 30x. Valuing the company at 32x FY23E EPS, we recommend buy on Infosys at CMP of for the Target Price of ₹ 1520.

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