HCLTech’s Q3 results were ahead of estimates led by higher-than-expected revenue growth in software business. Services segment witnessed growth moderation due to impact of furloughs. Deal bookings remained steady, however net hiring moderated and implied guidance for Q4 is soft. While we raise our estimates by 2-3% to factor the beat, we see limited upside amidst rising demand uncertainty. Maintain Hold with revised PT of Rs 1,050.
Results ahead of estimates: HCLTech’s Q3FY23 revenues at US$3.2bn, up 5% q-o-q in CC terms, Ebit margins of 19.6%, up 170bps q-o-q and net profit of Rs 41bn, up 19% y-o-y, were all ahead of estimates. The beat was mainly due to higher-than-expected revenue growth in the software segment.
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Growth led by software; services growth moderates: Growth was led by its software business which grew 30% q-o-q cc as Q3 is seasonally strong due to license bookings. Growth in services moderated to 2.2% q-o-q due to slower growth in both ER&D and IT&BS segments. While Life sciences, manufacturing and telecom verticals and Europe region supported growth in the services segment, growth in Americas region was muted with softness in Hitech, Retail and BFSI verticals partly due to higher than expected furloughs.
Steady deal wins; Deal sizes rising: HCLT won 7 large deals in services and 10 large deals in Software with net-new deal TCV of $2.3bn, up 10% y-o-y. Deal bookings include three very large deals worth $1bn. HCLT sees vendor consolidation and cost optimisation as key demand drivers. This is driving up deal sizes, reflecting in higher TCV growth but lower ACV growth, which in turn could lead to slower conversion of TCV to revenues.
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HCLT’s net hiring slowed to 3K – 2nd lowest in 9 quarters, though fresher hiring remained healthy at 6K. HCLT has narrowed its FY23 growth guidance by 50bps to 13.5-14% y-o-y in cc terms .
Software led margin recovery: HCLT’s margins rose by 170bps q-o-q to 19.6% due to a 12ppts expansion in software segment. Margins in the services business were steady q-o-q. Attrition moderated which should support margins in the future. We raise our margin estimates by 20-30bps to factor the beat and expect margins to be in the 18-19% range over FY23-25.
Maintain Hold: We raise our FY23-25 EPS estimates by 2-3% to factor the beat, over FY23-25, we expect HCLT to deliver 7% cc revenue CAGR and an 11% EPS CAGR supported by slight recovery in margins.