HCL Technologies' (HCLT) revenue growth was below our estimates mainly led by underperformance of product business. The company’s IT services revenues (88% of revenues) increased 5.2% QoQ partially offset by 8% QoQ decline in product revenues, said IDBI Capital Equity Research.

Going forward, the broking firm expects the company to report healthy growth in IT services revenues (~12% YoY) in FY22 partially offset by flat growth in product business. "Further, the company’s aim to increase payout to 75% of net income for next 5 years is key positives. However, lower than expected revenue growth compared to  industry and recent run up in price prompt us to maintain Hold rating on the stock with a target price of Rs 1,355 (24x FY23 EPS)."

Key highlights and investment rationale

Revenue growth guidance of double digit maintain for FY22

Revenue growth of 2.6%/11.3% QoQ/yoY in USD and +3.5%/10.5% in CC driven by strong growth across services portfolio led by digital business, engineering and cloud services. EBIT margin of 19% -60bps QoQ. Mode-2 solutions (25.8% of revenue) continued to lead the growth, +12.5%/36.3% QoQ/YoY in CC. Amongst verticals, growth was led by Lifesciences & Healthcare (15.3% of revenue) grew by 7%/20.1% QoQ/YoY in CC. USD 5100 million+ clients increased by 1 QoQ to 15. LTM attrition increased to 15.7% versus 11.8% sequentially. HCLT secured 14 large deals during the quarter at USD 2.24 billion up by 38% YoY. For FY22, HCLT reiterated its guidance for a double-digit revenue growth in CC, and EBIT margin guidance of 19% to 21%.

Cloud and app modernisation to drive revenue growth

HCLT is seeing acceleration in multi-year deal, cloud, cloud consulting, cloud migration, app modernisation. The company’s tenure of deals has also increased to five years from three years. Apart from healthy deal wins, HCLT plans to invest in Australia, Canada, France, Germany, Japan and emerging markets like Brazil, Mexico, South Korea and Spain, which, we believe, bodes well for medium term revenue growth (as the company can tap existing customers to drive growth). This coupled with healthy deal pipeline; robust hiring and improvement in Europe prompt us to build in 11.1% CAGR growth in FY21-23E.

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