HCL Tech Q3 Results Review - Good Performance, Valuation Attractive: Motilal Oswal

Motilal Oswal Report

HCL Technologies Ltd. delivered a strong revenue growth of 5% QoQ constant currency in Q3 FY23 (inline), led by seasonal gains in HCL Software (products and platform), which was up 30.5% QoQ in CC terms.

IT services grew by 2.2% in CC terms with a robust new deal total contract of $2.3 billion (flat QoQ/up 10% YoY). The company maintained its FY23 U.S. dollar revenue growth guidance of 13.5-14.0% in CC.

Further, it delivered a strong beat in Ebit margin at 19.6% (up 165 bps QoQ, 110 bps above our estimate), led by HCL Software, which was up 12.3%.

Services margin was largely flat QoQ (inline). HCL Tech narrowed its Ebit margin guidance to lower side at 18-18.5% from 18-19%.

Despite seasonality and a tough demand environment, HCL Tech maintained its growth momentum in both IT services and engineering research and development verticals. HCL Software delivered strong growth, ahead of expectations on seasonality.

The deal wins remained strong (book to bill of 0.7 times). While there is visible weakness in macro, especially in Europe, increased vendor consolidation deals, a strong pipeline of cost-take out deals, and favorable pricing should help HCL Tech tackle any softness in discretionary spending and weak macro.

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