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Nirmal Bang Report
HCLTech Ltd. delivered 6% constant currency QoQ revenue growth better than our expected 4%, due to better performance by both services and products and platform businesses.
This has to be seen in the context of weak numbers delivered by immediate peers. Margin performance was in line with our estimate but above consensus. The upper end of the FY24 revenue guidance has been cut from 5-6% to 5-5.5%. 18-19% Ebit margin guidance is maintained.
Services growth was driven by two months of the Verizon mega deal, two extra months of the ASAP acquisition, continued traction in ERS business and strong seasonal growth in P&P business.
Total contract value of order inflow (entirely net new) was at $1.9 billion, compared to the general $2-2.5 billion but is a sharp decline from Q2 FY24 of ~$4 billion (due to the Verizon mega deal).
We have tweaked earnings per share up for FY24-FY26 based on the Q3 FY24 performance.
We maintain a 'Sell' on HCLTech with target price of Rs 1245, which is based on target PE multiple of 17 times (15% discount to TCS, discount reduced from 25% due to the solid performance on revenue in FY24) on Dec-25 EPS. The discount of 15% is due to weakening of margins in the services business and lower return on invested capital compared to the benchmark.
Our view remains unchanged on the IT sector and HCLTech: We have been negative on HCLTech and the IT sector since April 2022 and continue to be cautious as we believe that the worst on the macro front is ahead of us.
We believe that our base case of a shallow U.S. recession in 2024 could pose a risk to both our as well as consensus earnings and PE multiples. We believe that we are in a ‘slower for longer’ kind of environment.
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Also Read: HCLTech Q3 Results Review - Higher ER&D Spends, Deal Ramp Up To Drive Growth: IDBI Capital
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