April 23, 2025
ADD
CMP (Rs): 1,480 | TP (Rs): 1,600
HCLTech Q4FY25 performance was slightly below our estimate. Revenue declined 0.8% QoQ CC due to Software business seasonality. Services grew 0.7% CC QoQ, while Software declined 12.9%. EBITM declined by 150bps QoQ to 18%. New deal wins were robust at USD3bn (~50% of booking took place in March). Deal pipeline is near an all-time high even after strong bookings in Q4. Considering the uncertain environment with subdued discretionary spends and slow start of the year due to passing-on of productivity benefits in Q1, HCLT has guided to 2-5% CC revenue growth (same for the company and Services; ~1% contribution from CTG incrementally) in FY26, implying CQGR of +0.1% to +1.3%. The lower end of the guidance assumes further deterioration in demand while the upper end assumes a stable demand environment and certain large deal closures in Q1. We cut FY26-27E EPS by 1-2%, factoring-in the Q4 performance and FY26 guidance. We retain ADD while cutting our TP by ~6% to Rs1,600, at 22x Mar-27E EPS (earlier 23x).
Results Summary
Revenue declined 1% QoQ (-0.8% QoQ/+2.9% YoY in CC terms) to USD3.5bn, a tad below our estimate. EBITM contracted by 150bps QoQ to 18%, impacted by seasonality in the software segment (124bps decline). Services segment EBITM decline of 38bps QoQ was due to wage hike (-50bps) and investments in S&M (-34bps), partly negated by forex gain benefits (46bps). Services revenue growth was led by Telecom (13.7% QoQ in USD terms), Financial Services (4.6%), and Technology & Services (1.4%), offset by decline in Retail and CPG (-7.9%), Â Lifesciences & Healthcare (-4.6%), Â Public Services (-2.8%), and Manufacturing (-2.0%), respectively. HCLT announced a dividend of Rs18/sh. What we liked: Strong deal intake, closer to record-high deal pipeline even after healthy closure in Q4, ER&D momentum (deal booking grew 75% in FY25). What we did not like: Continued weakness in Manufacturing, Lifesciences, and Healthcare.
Earnings Call KTAs
1) Tariff and deglobalization are likely to impact growth in IT Services stemming from budget cuts and contract negotiations or delays (one large deal deferral by client in Q4). 2) Discretionary spending will be subdued amid ongoing macro challenges. Clients would need RoI justifications to undertake new tech projects amid macro uncertainty. 3) Retail and Manufacturing are expected to see a direct impact from tariffs; this impact is likely to spread to other verticals with a lag, maybe within a quarter. 4) Deal Pipeline remains strong and broad-based across service lines, verticals, and geographies, with AI and Gen-AI being integral components of almost every deal. 5) Four flagship AI offerings”AI Force (57 deployments among 22 clients in FY25; plans to deploy 100 clients by FY26-end), AI Foundry, AI Labs (delivered 500 AI engagements for 400 clients), and AI Engineering – saw substantial adoption and scaling in FY25. 6) AI-driven efficiency led to deflation; however, the company increased its wallet share with existing customers, as it bakes in AI-led productivity gains in its bids. 8) It added 1,805 freshers in Q4 (7,829 in FY25) and plans adding more freshers in FY26 (targets adding 2-3k every quarter).
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