Stock pulse is a format where we explore the most important questions to understand the company's performance.
About HCL Tech
HCL Tech is a leading global IT services company, ranked amongst the top five Indian IT services companies in terms of revenues. HCL Tech offers an integrated portfolio of services including software-led IT solutions, remote infrastructure management, engineering and R&D services, and BPO services.
Consolidated Revenue Mix:
Business Segment
FY 2020
FY 2021
FY 2022
FY 2023
TTM
As a % of TTM revenues
IT & Business Services
50,742
53,401
61,742
74,015
76,581
72.8%
Engineering and R&D services
11,819
11,745
13,564
16,802
17,265
16.4%
HCL Software
8,115
10,243
10,370
10,639
11,299
10.7%
Total
70,676
75,389
85,676
1,01,456
1,05,145
100%
(Source: Company data, Amt in Rs. Cr)
Segment EBIT Margins:
Engineering and R&D services (ER&D) are a high-margin business (18-22%) as against IT & business services (16-17%, FY21 margins were abnormal and do not show a true picture). Although it's seasonal, the HCL Software segment is known for its very high margins. HCL has successfully increased the revenue share from ER&D + Software business to 25-30% and profit share from them to 35-40%.
EBIT Margins
FY21
FY22
FY23
TTM
IT & Business Services
20.0%
17.9%
16.6%
17.1%
Engineering and R&D services
21.4%
19.2%
20.2%
19.0%
HCL Software
28.3%
24.4%
25.1%
24.6%
Total
21.4%
18.9%
18.2%
18.4%
Recent Acquisition: HCL Technologies recently acquired the German automotive engineering services company ASAP Group. This strategic acquisition bolsters HCLTech's global leadership in engineering services, particularly within the fast-growing European automotive engineering services sector. ASAP Group specializes in services aligned with key industry trends, such as e-mobility, autonomous driving, and connectivity.
Recent quarterly performance:
In Q3 FY '24, HCL Technologies reported strong performance with a 6% sequential and 4.3% YoY revenue growth in constant currency, the highest since Q3 2021. Services revenue grew 3.1% QoQ, and software revenue increased by 5% YoY, driven by subscription and support revenue growth. Operating margins improved to 19.8%, even after accounting for wage hikes. The company received numerous awards, demonstrating leadership in IT services.
Across segments: In the software segment, ARR (Annual Recurring Revenue)reached $1.06 bn, growing 2.9% YoY. ER&D showed healthy organic growth of 2.5% QoQ. IT and business services grew 4.3% YoY and 1.9% QoQ in constant currency.
Across verticals: Telecom and media had outstanding growth of 25.9% QoQ, while manufacturing grew 7.6% QoQ. Financial services declined 1.3% QoQ but had a strong 12.9% YoY growth. Retail grew 2.9% QoQ and 11.7% YoY.
Across geographies: Europe grew 5% QoQ, Americas grew 3.1% QoQ and 6.7% YoY, and the rest of the world declined 5.3% QoQ.
Deal wins: HCL added significant clients on an LTM (last 12 months) basis and achieved YTD bookings of $7.5 bn, representing a 10% growth YoY. The company secured 18 large deals in the quarter, expanding its digital transformation partnership with a Fortune 50 consumer packaged goods company.
What's happening to global IT spending?
In the current economic climate, businesses have scaled back investments in digital transformation due to reduced demand. Instead, they are focusing on cost-reduction initiatives. This shift negatively affects services like application development, infrastructure implementation, and consulting, as these require a change in business perspective and are now considered less of a priority amidst the current challenging economic conditions.
Over the past year, many enterprises have realized that they previously allocated excessive budgets to transformation projects. Now, they are actively streamlining their expenses. Consequently, IT companies are winning a majority of deals related to cost reduction and optimization, shifting away from traditional digital transformation initiatives.
Has anything changed since last quarter?
Management commentary regarding business sentiment toward discretionary spending remains the same as in the previous quarter. However green shoots of growth were visible in the engineering segment, for FY24 HCL expects to close at 5% to 5.5% YoY growth. Management iterated thatthe environment is not conducive to increasingmargins at this point and thus is focused on gaining wallet share with vendor consolidation deals.
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Performance Consistency: This is measure based on whether the fund has beaten the benchmark index consistently. For
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Fund are color-coded Green provided the portfolio has 70% holding in Green stocks but not more than 20% in Red stocks.
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Funds ranking in screeners: Performance Consistency and Quality are two parameters used for ranking funds for SIP. The
ranking as follows GG, GO, GR, OG, OO, OR, RG, RO and RR.
With the same color-coded funds, the one with the higher Average 3-year rolling returns (over 5 to 10 years), the number
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Here is the summary:
The third tag Upside Potential is not relevant for SIP. It is relevant for lumpsum investments in Mutual Funds.
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