In its report, Sharekhan has maintained a Buy rating on HCL Technologies with a revised price target of Rs 1,200. Sharekhan says that HCL Technologies’ headline numbers remained below expectations in Q4FY21 owing to higher-than-expected seasonal decline in product business, while order bookings, employee additions and higher dividend payments remained impressive. HCL Tech reported a q-o-q revenue growth of 2.5% (at the mid-point of the company’s growth guidance of 2-3% for Q4FY2021) on constant currency (CC), This was below Sharekhan's estimates.

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Sharekhan report added that a sequential revenue growth was driven by a 4.4% q-o-q CC revenue growth in IT & Business Services, while the products & platforms (P&P) segment’s CC revenue growth declined 4.9% q-o-q owing to weak seasonality. US Dollar revenues grew by 3% q-o-q (including 0.9% revenue growth contribution from DWS acquisition) and 6% y-o-y to $2,695.9 million, below Sharekhan’s estimates. EBIT margin (excluding one-time special incentive) was down 261bps q-o-q to 20.3%, owing to wage revision, seasonal decline in P&P revenue, fresher hiring and other investments and forex. Reported EBIT margin stood at 16.6%, below Sharekhan's estimates. Adjusted net profit of Rs. 2,962 crore (down 25.6% q-o-q and 6.1% y-o-y) was ahead of Sharekhan’s estimates, aided by a rise in other income, but was offset by higher tax provision, Sharekhan highlighted.

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In this report, Sharekhan explains that HCL Tech signed 19 transformative deals across the verticals and new deal TCVs (Total Contract Value) remained at an all-time high during this quarter at $3.1 billion, up 49% y-o-y. For FY2021, new Deal TCVs are $7.3 billion, grew 18% y-o-y, and provide revenue visibility for FY2022. The management guided double digit revenue growth on CC terms (versus Sharekhan’s estimates of 10-12%) and operating margin at 19-21% (versus Sharekhan’s expectations of 20- 21%). Revenue growth would be driven by strong demand tailwinds, robust deal wins and strong traction for its IT & business unit and ERD business. However, management expects product & platform (P&P) business would be at a low single digit in FY2022 as the company plans to retire a couple of products where it sees decline characteristics.

Sharekhan says that HCL Tech Management expects that margin would be impacted in FY2022 owing to another round of wage revisions, investments in geographies, Mode-2 capabilities, higher net hiring local hires and reversal of COVID-19 savings.

HCL Tech Key positives:

Order bookings stay strong: TCVs up 49% y-o-y at $3.1 billion
Strong net employee addition (added 9,295 employees during Q4)

HCL Tech Key negatives:

P&P business revenue is expected to grow at low single digit in FY2022 Š
Guided lower-than-expected EBIT margin