Mgmt expects growth to be strong in the coming quarters; FY22/23/24 EPS down 2.4/3.2/1.1%; TP cut to Rs 1,220; ‘Buy’ retained.
HCLT missed its growth estimates for Q1FY22 (on back of a miss for Q4FY21): Revenue rose just 0.7% q-o-q in constant currency terms vs 4.8% for Infosys and 2.4% for TCS. However, despite the miss, management exuded strong confidence in its outlook. Deal wins in the past two quarters have been decent (c$4.7 bn), in our view, and the pipeline remains robust; the current pipeline is the highest ever, according to mgmt. Consequently, management expects strong growth sequentially in the coming quarters and, in fact, made a positive comment on the growth outlook for FY23 as well.
Employee additions are a reflection of company’s growth confidence: In the past six months, revenue has risen by 4% while employees have increased by 11%. Overall guidance for double-digit revenue growth for FY22 and 19-21% Ebit margins was left intact, which implies a decent CQGR of 2.8% from Q2FY22 to Q4FY22. Surprisingly, ER&D rose strongly in Q1FY22, and the company expects this strong pick-up to continue. Q1FY22 was impacted by the slow ramping up of some deals and the exiting of certain professional services deals.
Q1FY22 highlights: HCLT’s 0.7% revenue growth was dragged down by a 1% q-o-q decline in cc terms for its seasonally weak products and platforms business (y-o-y growth was largely in line with company’s guided low to mid-single digit range). ER&D rose 4.3% q-o-q whereas IT and Business service revenue was flat. Revenue was soft in Europe (down 3.9% q-o-q, cc); however, mgmt remained confident of growth returning, and the company has ramped up investments in the sales team in the region. Americas grew 2.6%.
In terms of verticals, growth was focussed on Life Sciences & Healthcare (up 5.4% q-o-q in cc terms) and BFSI (up 2.9%), whereas Manufacturing (down 2.2%), Retail (flat q-o-q) and Technology & Services disappointed. Mgmt indicated a hit of 20-30bps to the top-line from COVID-19 related supply issues and 90bps hit to margins. It called out a further 35bps of impact on the Ebit margin owing to hiring and retention costs and 30bps attributable to investments in new markets. Attrition inched up by c200bps to 11.8% (last 12 months). As with peers, it cited the crunch on the talent supply side and is ramping up fresher hiring.
Retain Buy but lower TP to Rs 1,220 from Rs 1,255 on EPS cuts: Our EPS estimates for FY22e/FY23e/FY24e change by -2.4/-3.2/-1.1% mainly because we factor in our now lower assumption for profitability for FY22e. We continue to value HCL at our unchanged target multiple of 24x 12-month forward EPS. Given our revised estimates, we lower TP to Rs 1,220 from Rs 1,255. We retain Buy rating.