HCL Tech posts 7.1% rise in Q2 profit; lifts sales, Ebit guidance

The Shiv Nadar-founded company increased its FY23 revenue expectations to 13.5-14.5% from the 12-13% range earlier, while it expects to stay in the Ebit margin range of 18-19% now, compared to 18-20% earlier. Constant currency growth came in at 15.8% y-o-y. The company has guided for a 16-17% IT services Ebit margin for this fiscal.

“HCL Tech has delivered yet another solid performance this quarter. Our services business grew 5.3% QoQ and 18.9% YoY in constant currency, led by strong demand for cloud, engineering and digital services. This is a validation of the strategic choices we made and the effectiveness of our operational framework. Our bookings and pipeline continue to be very strong. Our new brand positioning of Supercharging Progress has been well received and I am confident that will help us deliver on our strategic priorities,” said C Vijayakumar, managing director and CEO, HCL Tech.

HCL Tech’s rupee revenue for Q2 rose 19.5% y-o-y, to ₹24,686 crore while dollar revenue was at $3,082 million, up 10.4% from the corresponding quarter previous year.

On the operational front, while the company reported a rise in Ebit to ₹4,427 crore, up 12.2% y-o-y, its margin has slipped 120 basis points during Q2, to 17.9% versus 19.1% y-o-y.

Shares of HCL Tech ended Tuesday’s trading session on BSE at ₹952 per share, up 1.43%, ahead of the announcement. The stock has seen a wealth destruction of 26.3% year-to-date (YTD).

HCL Tech has reported an attrition rate of 23.8% in IT services for the quarter, surpassing both TCS (21.5%) and Wipro’s (23%) figures. HCL Tech added 8,359 employees during the quarter, taking its headcount to 219,325.

HCL Tech, too saw the biggest chunk of revenue coming from the US market this quarter, with a 64.8% share in total revenue, followed by Europe (27.5%) and the rest of the world (7.7%).

“The highlight of the quarter’s performance is (rupee) revenue growth. We have improved Ebit margins sequentially, led by operating leverage and efficiencies, despite the impact of salary increments for the largest section of our people. Our H1 growth & deal wins lead us to increase our revenue guidance for services and at company level. Our cash flow generation continues to be robust with operating cash flow at $2,049 million, being 114% of net income,” said Prateek Agarwal, chief financial officer, HCL Tech. 

Financial services led sectoral growth for HCL Tech in Q2 with a 20.6% contribution, followed closely by manufacturing (19.2%) and tech and services (15.1%), the statement added. 

The company has claimed to have bagged 11 large deals in Q2FY23, with 8 in services and 3 in products. Deal value in total contract value (TCV) basis stood at $2,384 million, up 6% y-o-y. 

“HCLT reported strong results for the quarter with margins above our expectations,” said Mitul Shah, Head of Research at Reliance Securities. Shah gave a ‘hold’ recommendation on the stock with a 1-year target price of ₹1000, while earning upgrade and TP revision is on the cards. Sharath Srinivasamurthy, associate vice-president, enterprise solutions, IDC India, concurred, adding that “the covid-induced digital transformation projects are still continuing and under execution,” which are adding up to revenues.  

“One thing, however, that stood out was the lack of multiple large deals this quarter. This is reflective of the slowdown in the market, where clients would become more cautious in the way large deals are signed,” he pointed out. “With the key big deal that HCLTech announced (HCLT announced a new undisclosed deal during the earnings call, which will show up in revenues for FY24), which would come into effect in their revenues in FY24, are the ones that would help these companies keep up their revenue streams to tackle the macroeconomic headwinds.” 

The September quarter also marked the launch of Supercharging Progress, HCL Tech’s new brand positioning focused around ESG (environmental, social and governance). Under the initiative, the company’s CSR (corporate social responsibility) arm has rolled out a range of programs in India to uplift communities, according to the regulatory filing. The company claims to have been ranked 22nd among 1,000 companies in the software and services sector Sustainalytics ESG rating. 

“Our new brand identity brings razor-sharp focus to our go-to-market strategy and execution capabilities. With our differentiated portfolio, we are well-positioned to leverage the opportunities that lie ahead in the digital-first world,” HCL Tech chairperson, Roshni Nadar Malhotra said in the statement. 

“In terms of our focus on new markets, we have new locations for our facilities across India, which we call ‘new vistas’. We already have 25,000 individuals working in these facilities, and each year, we will hire approximately 5-10% more headcount to these facilities than the average addition we make to our workforce, to grow them,” Vijaykumar told reporters here in Delhi.  

On a sequential basis, HCL Tech’s net profit saw a rise of 6.3% while rupee revenue rose 5.2%. Dollar revenue for the September quarter was up 1.9% and Ebit rose 10.9% q-o-q. He added that the company already works with over 100 telcos across geographies on 5G services, which adds to its overall growth projection.