Mr. Mitul Shah, Head of Research at Reliance Securities
HCL Technologies' (HCLT) revenue came in at US$2,993mn in 4QFY22, 1.8% below our expectation of US$3,048mn. The sequential constant currency growth stood at 1.1%, vs. our expectation of 2.7%, due to de-growth of 24% QoQ CC in product and platform (P&P) business. EBIT margin stood at 18%, 10bps below our expectation of 18.1%. Net profit stood at Rs35.9bn, 7.8% ahead of our estimate of Rs33.3bn, driven by the higher non-operating income and lower tax rate. New deal TCV stood at US$2,260mn (up 6% QoQ). Services revenue (IT and engineering) was up 5.2% QoQ CC, while revenue from P&P business was down 24% in 4QFY22. We expect HCLT to report a significant revenue, with 13% revenue CAGR over FY22-FY24E, driven by consistent transformation deal wins, increasing focus on ER&D services and rising share of Mode 2 business. We lower our FY23E and FY24E EPS estimates by 10% and 8.7%, due to margin contraction despite deal wins. We retain our BUY recommendation and revise the target price to Rs1,351 (vs. earlier Rs1,480), valuing the stock at an unrevised P/E multiple of 22x FY24E earnings.
Double Digit Revenue Growth and Healthy Margin Guidance
(1) Growth momentum was led by telecommunications & Media (20% YoY CC), life sciences & healthcare (19% YoY CC), manufacturing (17% YoY CC) and technology & services (14.3% YoY CC). (2) LTM attrition was at 21.9% (up 210bps QoQ). During 4QFY22, the company added a net work force of 11,100 employees. (3) HCLT expects 12-14% CC FY23 revenue growth and FY23 EBIT margin of 18%-20%. (4) It declared an interim dividend of Rs18/share (vs. Rs10/share in 3QFY22). Company's healthy double-digit revenue growth and strong margin guidance would help its double-digit earnings growth trajectory going forward. Moreover, aggressive employee addition and healthy TCV deal wins provide decent business visibility.
Outlook and Valuation
We believe that HCLT's revenue growth momentum would continue going forward on the back of strong deal wins and all-around growth in IT space. However, its operating margins would further contract from current level in 1QFY23. We expect near-term pressure on the EBIT margin, driven by rising attrition, accelerated hiring and expanded SG&A cost, while it would recover in 2HFY23 and in FY24. We estimate FY23E/FY24E EBIT margin of 18%/18.7%. We expect HCLT to report a significant revenue growth, with 13% revenue CAGR over FY22-FY24E, driven by consistent transformation deal wins, an increasing focus on ER&D services and rising share of Mode 2 business. At CMP, the stock trades at 17.9x FY24E, which is a 31%/29% discount to larger peers (TCS/Infosys). We believe that HCLT's valuation is still comfortable and gives decent potential upside, considering strong earnings growth. Thus, we retain our BUY recommendation with a 1-year target price of Rs1,351, valuing the stock at 1 year forward P/E of 22x FY24E earnings.
Shares of HCL Technologies Limited was last trading in BSE at Rs. 1101.80 as compared to the previous close of Rs. 1099.60. The total number of shares traded during the day was 444194 in over 19101 trades.
The stock hit an intraday high of Rs. 1135.00 and intraday low of 1083.55. The net turnover during the day was Rs. 495676417.00. |
