HCL Technologies: Strong end to FY24, bodes well for FY25 growth

15 Feb 2024 , 12:39 PM

Analysts of IIFL Capital Services hosted the management of HCL Tech (HCLT) at IIFL’s Investor Conference in Mumbai. Management sounded confident of maintaining top quartile growth in its services business in FY25, however, decision-making on discretionary spends by clients still remains stretched. HCLT has started seeing green shoots in ER&D. HCLT has been able to increase margins over the last two quarters, despite investments in headcount and large deal ramp ups. Management is confident of meeting its FY24 Ebit margin guidance of 18-19% and continues to aspire to go back to 19-20% margin over the medium-term. Analysts of IIFL Capital Services forecast 8%/9% USD revenue/EPS Cagr over FY24-26. With the stock trading at 26x/24x FY25/FY26 P/E, risk reward is balanced. Maintain ADD. 

Confident of sustaining top quartile growth in FY25: 

Given the strong exit rate, improving ER&D demand and healthy order book/pipeline, HCLT is confident of sustaining top quartile growth for its Services business. However, in terms of discretionary spend there is little change to the overall demand environment and initial indications of CY24 technology budgets by and large are flat YoY. Management believes the GCC cycle is taking off, which could take away some share from service providers, however this is likely to be cyclical like it has been in the past. 

Longer-term Ebit margin aspiration remains 19-20%: 

HCLT is confident of meeting its FY24 Ebit margin guidance of 18-19%, despite the investments and large deal ramp ups. HCLT was the only large cap IT Company to see sequential headcount increase in Q3. Over the mediumterm, employee pyramid rationalization, productivity benefits, operating leverage from revenue growth and automation are likely to take margins back to the 19-20% range. 

GenAI incrementally becoming part of every deal: 

HCLT highlighted that with every passing quarter, GenAI is increasingly becoming part of every deal. However, given the requirement of data to be structured to effectively deploy GenAI, the initial work that will come for IT services will be around data, which in itself will be a large opportunity. HCLT is seeing traction across sectors on GenAI, however Financial Services and Life Sciences are seeing the highest number of use cases.