HCL Technologies' Q3 FY21 results beat our estimates across the board with revenues up 3.5% QoQ, EBIT margins up 130 bps QoQ, and PAT, up 27% QoQ, all ahead of estimates. P&P business growth and margin expansion were key positives; however, its margin guidance for 4Q disappointed. Demand environment remains strong. HCL Technologies raised Q4 revenue growth guidance by 50 bps to 2-3%. Jefferies raise their FY21-23 estimates by up to 9% and maintain BUY with a revised price target of Rs 1200/share.

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HCL Technologies' Q3 FY21 results beat estimates across the board. Revenues at US $2.6 bn, up 3.5% QoQ in CC terms, EBIT margins at 22.9%, up 130 bps QoQ and profit at Rs 39.8 bn, up 27% QoQ were all ahead of expectations. The margin beat was driven equally by higher than expected revenues and lower direct costs. Profit beat was driven by higher than expected EBIT margins and reversal of Rs 4 bn of tax provisions set up in prior years for an uncertain tax position.

HCL Technologies revenues recovered completely from Covid in Q3 with the company reporting 1.1% CC YoY growth. Growth in Q3 was broad-based across verticals and segments. Strong growth of 8.3% QoQ cc was among the key positive surprises of Q3 on the back of growth in new license sales and renewals. Recovery in the ER & D segment was slower than expected. HCL Tech witnessed sharp growth recovery in Europe in Q3. Growth was led by verticals recovering from Covid Shock with Communications, Manufacturing and retail all driving growth. Tech (+6.8% QoQ) remained a strong growth driver too.

Encouraging growth outlook; FY21 growth guidance raised:

HCL Tech won 13 transformational deals during Q3 vs 15 in Q2 and witnessed a 13% YoY growth in TCV. Management highlighted that the demand outlook remains strong with cloud, experience and digital transformation driving spends. Traction on P&P business has also been strong with US $90 mn quarterly net new booking. HCL Tech has raised revenue growth guidance by 50bps to 2-3% QoQ for Q4 to factor DWS acquisition.

HCL Tech has raised FY21 guidance by 50-100 bps to 21-21.5%, implying 19.1-20.9% margin in 4QFY21, a 200 bps QoQ decline at upper end partly due to residual impact of wage hikes in Q4 FY21. With hiring to rise from Q4, HCL Tech expects employee costs to rise and impact margins further.

While strong delivery in the P&P business surprised positively, continued weakness in ER&D services disappointed. Jefferies raised their estimates by upto 9% to factor in the beat and see the company delivering 10% revenue and 10% EPS CAGR over FY21-23. HCL Tech continues to offer value, given that it trades at 25-40% discount to TCS/Infosys while offering similar growth. Jefferies maintains Buy with a revised price target of Rs 1200 based on 21x PE - a 25% discount to Infosys.