HCL Tech raised the lower end of its growth guidance range for FY20e to 16.5% from 15% , but kept the upper end unchanged at 17%
HCL Tech’s Q3 results were ahead on both growth (2.1% q-o-q cc vs 1.5%) and margin (20.2% vs 19.6%); the company also raised FY20e growth guidance to 16.5-17% from 15-17%, and margin guidance to 19-19.5% vs 18.5-19.5%. A lower tax rate was the other positive. However, the beat in Q3 was driven entirely by Products & Platforms while IT & ERS slowed. Maintain Hold as we expect organic growth momentum to slow and remain cautious on significant product exposure.
Q3 revenue, margin ahead of estimates: HCL Tech’s Q3 revenue growth of 2.1% q-o-q cc/16.4% y-o-y was ahead of our estimate of 1.5% q-o-q. We note, though, that the beat was driven entirely by Products & Platforms, which grew at 16.8% q-o-q cc even as growth in IT & Business services and ERS was muted, at 0.1% /0.7%, respectively. Ebit margin of 20.2% was also ahead of our expectation of 19.6%. Other income was lower but was more than offset by lower taxes. In fact, management has lowered its effective tax rate guidance to 22%, vs 23-24% earlier. It announced an interim dividend of `2 per share, effectively a doubling of the previous run-rate given the recent 1:1 bonus issue.
Revenue growth, margin guidance raised: HCL Tech raised the lower end of its growth guidance range for FY20e to 16.5% from 15% , but kept the upper end unchanged at 17%. Management also indicated that this includes a 6% contribution from inorganic vs 5-6% earlier and 10.5-11% from organic vs 10-11% earlier. It also tightened its margin guidance range to 19-19.5% from 18.5-19.5%.
Maintain Hold: We raise EPS estimates by 2-4% over FY20-22e, mainly to reflect higher margin and a lower effective tax rate. Our price target increases to Rs 630 (prev. Rs 575) as we also factor in the impact of roll forward. We maintain Hold as we expect the organic growth momentum of recent quarters, helped by large deal wins, to ease, and we remain cautious on HCL Tech’s significant product bet.