HCLTech Q1 Results Review - Broad-Based Sequential Revenue Growth Likely In Q2: Systematix

Systematix Research Report

HCLTech Ltd.’s Q1 FY25 revenue decline of 1.6% QoQ in constant currency and 1.9% in USD terms was tad better than our estimate of 2% decline in USD revenue. Management attributed the revenue loss to early offshoring of one of its large contracts which they indicated in the last Q4 FY24.

Even though the loss was lower than what they had expected, a steep decline (more than 6% QoQ decline) in the manufacturing vertical (19.4% of revenue mix in Q1 FY25) disappointed, caused by-

1. the weak performance of its recently-acquired ASAP entity, as couple of projects were ramped down,

2. some stress in Germany’s EV space, resulting in digital engineering work being postponed, compared to it being a priority in the earlier part of Q1.

The company indicated this impact is likely to offset in Q2 (by other projects in manufacturing) and hence manufacturing along with all other sectors (except BFSI) will likely help in sequential growth in Q2 at the company level.

Management believes the BFSI vertical may bear an impact of State Street joint venture exit in Q2, and likely recover Q3 onwards. It indicated that several clients have evinced interest in generative AI, but it is yet to see full-fledged spending from some clients, despite their highly profitable businesses. Perhaps, clients are awaiting relief from the high interest rate scenario prior to loosening their purse strings.

HCLTech is currently offering 10-40% productivity benefits on various programs through generative AI. We have tweaked our estimates on Q1 performance to build in 6.5% USD revenue CAGR over FY24-26E (6.3% earlier) but have largely retained our margin and earnings numbers.

We reiterate Hold with a revised target price of Rs 1,465 (Rs 1,470 earlier), valuing the company at a similar multiple of 22 times FY26E EPS.

Key risks: Sudden exits at the leadership level, sustained pressure on client discretionary spending in FY25/FY26, non-encouraging outcomes of cost saving programs, etc.

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