HCL Technologies Q4 Results Review - Defensive Portfolio To Help Navigate Macro Headwinds: Motilal Oswal

Motilal Oswal Report

HCL Technologies Ltd.’s Q4 FY23 revenue declined 1.2% QoQ in constant currency, dragged by seasonal weakness in software business (down 14.6% QoQ in CC) along with a sudden ramp down in engineering research and development vertical (down 3.8% QoQ in CC).

IT services, however, grew by a reasonable 1.6% QoQ in CC despite slowing demand environment. Net new deal total contract value was also soft at $2.1 billion (down 12% QoQ and 8% YoY) in Q4, while FY23 TCV ($8.86 billion) was up 6.7% YoY.

Management guided for FY24 USD revenue growth of 6-8% YoY in CC (6.5%-8.5% YoY in CC for services).

Ebit margin for Q4 FY23 (at 18.2%, down 140 bps QoQ) was in line and dipped due to seasonal weakness in software business coupled with the adverse impact from revenue decline in ER&D business. Management guided for FY24 Ebit margin to be in the 18-19% range and it maintained its mediumterm margin aspiration of 19-20%.

While HCL Tech’s IT services vertical (up 1.6% QoQ in CC) fared better than its larger peers (Tata Cconsultancy Services Ltd. and Infosys Ltd.), cutbacks in discretionary spends in tech and telecom verticals hit ER&D and overall services business (up 0.6% YoY in CC).

With continued traction in renewals and vendor consolidation, we expect the IT services vertical to deliver decent growth of 8.5% YoY in CC despite muted TCV (book-to-bill of 0.6 times).

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