HCL Technologies: Organic growth driving expansion in returns

4 Sep 2023 , 11:23 AM

Recommendation: Add; Target Price: Rs 1070

 

HCLT’s FY23 Annual Report (AR) is one of the most comprehensive releases in recent years, highlighting the company’s focus on building capabilities and outlining medium-term objectives. Investments were made in AI ecosystem, HCL CloudSmart suite, HCLSoftware and domestic talent. HCLT’s revenue growth in FY23 was led by its Services business. However, even the Products and Platforms business grew marginally. Ebit margins declined 70bps YoY, due to investments in talent and higher travel, still lesser than other large-cap peers. Cashflow conversion (FCF/PAT ex-acquisition) showed consistency by delivering above 100% for the thirdstraight year and remaining above the large-cap peers. With the M&A intensity muted and breaching the stated 75% dividend payout policy in FY23 — return metrics improved, with RoE at 23.3% and RoIC at 19.7%. Maintain ADD. 

HCLT Services biz delivers robust growth; investments dent margins: 

During the year, HCLT’s Services business led growth, growing at 15.8% cc YoY, crossing USD11bn in annual revenues. Products and Platforms business also grew 1.8% cc YoY, ex-divestments. Order book remained steady with new booking TCV growing 7% YoY. Overall Ebit margins declined by 70bps YoY, due to higher employee and travel costs – partially offset by lower D&A costs. 

Cash generation remains strong: 

At 112%, cash conversion (FCF/PAT ex-M&A) remained robust, despite some normalisation of working capital. HCLT’s cashflow generation was the highest among peers for the third-straight year. The absence of any large M&A during the year helped HCLT report a strong FCF (incl. M&A)/PAT of 106%, and also improve RoE to 23.3% (+110bps) and RoIC to 19.7% (+120bps). 

Other notables: 

1) HCLT’s CEO Mr Vijayakumar received a remuneration of Rs279mn in FY23, significantly lower than FY22 owing to the absence of biennial long-term incentives due in FY24 next. 2) HCLT has ramped up spending on R&D (+6% YoY). 3) HCLT continues to increase its hiring from smaller cities in India, which is now 13% of the India headcount. 4) The % increase in the median remuneration of HCLT’s employees in FY23 was 0.01% vs 11.42% in FY22.