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Motilal Oswal Report
Service business poised to rebound strongly HCLTech Ltd.'s operating performance has relatively been steady for the consolidated business, while the service business (IT plus engineering research and development) has delivered remarkable performance over the last two years, up ~15% YoY in constant currency terms each in FY22 and FY23.
The near-term service business has been adversely impacted by reduced discretionary spends, which is expected to see a sharp recovery (especially ER&D service line) as the macro challenges taper off. The ER&D service line has been resilient, evidenced by a strong uptick in demand post Covid.
We remain positive on the structural theme of ER&D outsourcing and HCLTech should win disproportionately and clock 15.5% revenue compound annual growth rate over FY24-26E, given its capabilities and scale within the space.
We expect IT and business service (~75% of rev) to deliver moderate growth of 9.5%/11.5% in FY25E/FY26E, aided by mega deal ramp-up and robust BTB.
On the earnings front, the company is intensifying efforts to optimise the employee pyramid and eliminate the overutilization of subcontractors.
HCLTech's earnings growth has relatively been stable compared to the earnings growth of its peers, despite the fact that the company is expected to clock 15.3% CAGR over FY24-26E.
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