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Mirae Asset Capital Markets views on HCL Tech Results Q2 FY25

  • HCL Tech’s CC revenue grew 1.6% QoQ (up 6.2% YoY CC), ahead of our estimates, led recovery in IT services business (1.6% QoQ in CC versus -1.9% in 1QFY25) and strong growth of 1.4% QoQ CC in HCL software revenue. CC YoY revenue grew 6.2% YoY. In reported terms, USD revenue was up by 2.4% QoQ to USD 3,445 mn versus our estimates of USD 3,411 mn, better than our expectations.
  • HCL Tech IT and business services revenue was up 1.8% QoQ on CC, better than our expectations. HCL software revenue was up by 1.4% QoQ (up 9.4% YoY) in CC terms, highest in 2Q in the last three quarters.
  • EBIT margin improved 150bps QoQ to 18.6%, led by strong margin improvement in both ER&D business (up 183bps QoQ) and HCL Software (up 503bps QoQ), and absence of productivity gains passed on to clients in select contracts. The improvement in HCL Software’s margin is the highest in 2Q in the last several years. Net profit came to INR 42,350mn, up 10.5% YoY, ahead of our estimates by 4.5%, led by to better than expected revenue and margin.
  • HCL Tech maintained its revenue growth guidance of 3%-5% in CC for FY25E despite CC revenue growth of 5.9% YoY CC in 1HFY25. The company increased the lower end of service revenue growth guidance band to 3.5%-5% YoY in CC to 3%-5% earier. HCL Tech maintained its EBIT margin guidance of 18-19% for FY25E.
  • Net employee reduction stood at 780 on QoQ during the quarter. Attrition rate inched up by 10 bps to 12.9% versus 12.8% in 1QFY25. TCS’s attrition rate also increased by 20bps QoQ in 2QFY25.
  • HCL Tech’s deal TCVs increased by 13.2% QoQ, but down 44.1% YoY to USD 2,218mn versus USD 1,960mn in the previous quarter. However, TTM TCVs declined by 15.7% YoY.
  • HCL Tech’s top 5, and top 10 clients continued to grow strongly on QoQ and YoY basis. Top 5 and top 10 clients were up by 32% YoY and 25% YoY in 2QFY25, while non-top 20 clients grew by 1.7% YoY.
  • The company added 4 clients each on QoQ basis under USD 50mn and USD 20 mn revenue bracket, while number of USD 100 mn clients was flat on QoQ.
  • The company declared a dividend of INR 12 per share during the quarter. LTM FCF/NI remained at 119% versus 133% in the previous quarter.
  • View: The company beat headline numbers across all financial fronts. YoY CC revenue growth of 5.9% in 1H remained higher than TCS’ CC growth of 5% YoY. The company reported broad-based growth across verticals (flattish for financial services) and regions. North America reported YoY CC revenue growth of 7.5% versus -2.1% YoY for TCS. Further, the top 5 and top 10 clients have been growing strongly. Deal TCVs remained healthy during the quarter. The company increased its lower end of service revenue growth guidance to 3.5%-5% from 3%-5% earlier. We have HOLD rating on the stock.