HCL Tech Q1 Results Review - Disappointing, But Attractive Valuation Factors In Weak FY24: Motilal Oswal

Motilal Oswal Report

HCL Technologies Ltd. reported a weak Q1 FY24 with revenue of $3.2 billion, down 1.3% QoQ in constant currency and 110 basis points below our estimate.

Continued ramp-downs in telecom and technology verticals, mainly in engineering research and development (-5.2% QoQ in CC), led to the underperformance.

Net new deal total contract value was also muted at $1.56 billion (down 25% QoQ), but the deal pipeline was at all-time high. Despite the weak quarter, HCL Tech has maintained its FY24 USD revenue growth guidance at 6.0-8.0% YoY in CC (6.5%-8.5% YoY in CC for services).

Ebit margin declined 120 basis points QoQ to 17.0%, missing our estimate by a huge 140 bps, despite a 2,500 reduction in workforce (-1.1% QoQ). The miss was led by lower utilisation due to project delays and one-time travel costs. The management has retained FY24 Ebit margin guidance at 18.0-19.0%.

Surprisingly, the management has retained FY24 revenue guidance despite the weak Q1 print. It is confident about the guidance in anticipation of fast scale-up of large deals in IT services and a rebound in ER&D business in Q2.

But we see elevated risk to HCL Tech’s growth guidance on account of the steep ask rate over the next three quarters, and hence our estimates are 30 bp below (at 5.7% YoY CC) the lower end of the management’s guidance band. This implies a strong ~3% compound quarterly growth rate for the next three quarters.

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