HCL Technologies Rating: add- A good showing by the firm in third quarter


HCLT’s guidance for the March 2021 quarter of 2-3% on revenues includes ~1.1% contribution from DWS acquisition, implying organic sequential revenue of 0.9-1.9%; the range appears a touch lighter than our expectations.

HCLT reported a good quarter—in line in services and surprising buoyancy in products business. Guidance for the March 2021 quarter was a touch light with moderated revenue growth. Nonetheless, HCLT in our view will have a good FY2022e led by digital foundation activity, potential large deal wins and recovery in ERD. We raise FY2021-24e EPS by 5-8% on marginal revenue upgrade, Ebit margin increase and lower tax rate. Fair Value increases to Rs 1,120 on SoTP basis. ADD.

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Strong growth in products and platforms business; Ebit margin spikes
HCLT reported a good 3.5% q-o-q and 1.1% y-o-y growth on c/c basis. Growth was led by the products business at 8.3% on a sequential basis on the back of high renewals and new licence sales. IT Services and ERD growth at 2.7% and 2.5% q-o-q was steady. Ebit margin increased 130 bps q-o-q (2.7% y-o-y) on the back of offshore shift (50 bps), high collection efficiency and SG&A leverage (reversal of bad debt provisions, 80 bps benefit), revenue catch-up (40 bps one-time) and growth leverage that offset the impact of wage revision (50 bps). Lower-than-expected tax rate led to 26.7% q-o-q and 31.1% y-o-y growth in net profit to Rs 39.8 bn.

Modest guidance for March quarter
HCLT’s guidance for the March 2021 quarter of 2-3% on revenues includes ~1.1% contribution from DWS acquisition, implying organic sequential revenue of 0.9-1.9%; the range appears a touch lighter than our expectations. While HCLT has done well in digital foundation deals and strong growth in digital services, we find overall bookings (13% growth yoy) and large deal activity muted. Implied Ebit margin guidance for Q4FY21e stood at 19-21%, down 1-3% q-o-q.

Products business is the surprise package and grew 9.3% y-o-y
The products business grew 9.3% y-o-y on c/c basis and held up well through the course of the pandemic. The company also managed net new licence TCV of $91 mn, up 3.5X y-o-y. It had 350 new logo wins in the quarter. Management indicated that the business is tracking ahead of expectations. We are surprised with the resilience in products and raise our revenue estimates by 3-7%. We forecast 3% growth in FY2022 and FY2023.

Raise EPS estimates by 5-8% for FY2021-24e, Fair Value to Rs 1,120
The increase in EPS estimate is on account of—(i) marginally higher margin assumption; we were conservative earlier; and (ii) below Ebit line adjustments such as lower tax rate. We raise our SoTP-based Fair Value to Rs 1,120 from Rs 1,040 earlier. HCLT is a solid play on cloud shift, improved digital play and growth runway in underpenetrated ERD opportunity. Retain Add.

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