The conservative stance could reflect macroeconomic influences. However, amidst robust US growth and signs of a global economic resurgence, promising prospects emerge for IT services.
HCL Technologies Surpasses Expectations in Q3FY24 Results
HCL Technologies has outperformed its peers to deliver robust results in the third quarter of the financial year 2024. The company’s revenue surged by 6.0% sequentially in constant currency (CC) terms, surpassing market expectations and reaching $3.4 billion. Notably, the growth was primarily driven by a remarkable 34% quarter-on-quarter (QoQ) increase in HCL Software (Products & Platforms). Additionally, the services segment experienced a 3.1% QoQ growth, contributed by both IT and ER&D verticals.
Deal Wins and Revised Forecast
Despite the impressive performance, HCL witnessed a decline in the total contract value of deal wins, dropping to $1.9 billion from the Q2FY24 high of $4 billion. However, the company secured 18 large deals, comprising six in services and 12 in software. Furthermore, the company adjusted its FY24 dollar revenue growth forecast to 5.0-5.5% Year-over-Year (YoY) in CC, narrowing from the earlier range of 5.0-6.0%.
Ebit Margin and Future Guidance
HCL’s Ebit margin surpassed expectations, reaching 19.8% with a 130 basis points improvement QoQ. Notably, HCL Software achieved an impressive 32.9% margin, while the services margin experienced a 50 basis point contraction QoQ. Despite this, HCL has maintained its Ebit margin guidance of 18-19%, demonstrating a more positive outlook compared to its peers, some of whom have indicated challenges in the fourth quarter.
Overall, HCL Technologies has exhibited a strong performance in Q3FY24, with notable growth in both its services and software segments, as well as higher-than-expected Ebit margins. However, the company faces challenges in deal wins and has revised its revenue growth forecast for FY24. It will be interesting to see how HCL navigates these challenges and sustains its performance in the coming quarters.
Workforce Performance
Among the “Big Four,” HCL stood out as the sole company to boost its net headcount, adding over 3,600 employees to surpass 224,000. Notably, all four major players witnessed a noteworthy decline in attrition rates, marking the fourth consecutive quarter of this encouraging trend.
4Q Guidance and Growth Prospects
The outlook for the service vertical in the upcoming quarter appears optimistic based on the implied 4Q guidance, despite a decrease in deal wins and a high base. In the last quarter, the services business displayed a 3.1% QoQ growth in constant currency, chiefly driven by the remarkable performance of IT Services (+1.9% QoQ in CC) and ER&D (+8.7% QoQ in CC, factoring in the impact of ASAP Holdings’ merger).
Product and Platform Focus
HCL Software exhibited strong growth, albeit with a seasonal component. Accelerated growth in this segment could significantly bolster future revenues. HCL’s strategic emphasis on Products & Platforms (P&P), initiated with the acquisition of multiple IBM products in 2018, sets it apart from other Indian service-oriented firms. While Q4 traditionally demonstrates weakness for products, sustained growth in this segment through Q4FY24 could yield favorable base effects for revenue growth.
Growth Potential and Management Guidance
Attaining the mid-point revenue growth guidance in FY24 (in USD constant currency) may pave the way for a revenue Compound Annual Growth Rate (CAGR) of 9.8% over FY23-26 for HCL. Similarly, achieving the mid-point EBIT margin projection could result in a rupee-denominated Profit After Tax (PAT) CAGR of 12.7% over the same period. However, despite the strong performance in products and the evident confidence reflected in the increase in headcount, the management guidance or statements don’t exude an equivalent level of confidence. The guidance for margins and growth has not been revised upward despite the company’s robust performance. The CEO highlighted the absence of a discernible rebound in demand, indicating a cautious stance.
Macroeconomic Influences and Market Prospects
The cautious approach could stem from macroeconomic influences, yet indications of a worldwide economic resurgence, like the robust recent growth in the US, could imply brighter prospects for IT services. Additionally, the P&P segment is gaining momentum, and the merger with ASAP Holdings has fortified HCL’s position in the automotive sector and European market.
Market Revaluation
Though historically HCL Tech has experienced lower price-to-earnings (PE) multiples compared to other tier-1 IT firms, its current exceptional performance could potentially trigger a revaluation, particularly if it surpasses expectations in Q4FY24.
By meticulously examining these nuanced facets of HCL Technologies’ performance and strategic maneuvers, it becomes evident that the company is poised at a crucial juncture with promising growth opportunities and substantial potential for market revaluation in the foreseeable future.
