..... . VALI disclosures . .....: 15/01/25, HCL TECH Q3 results

Wednesday, January 15, 2025

15/01/25, HCL TECH Q3 results

HCL TECH (CMP: Rs 1,989, Market Cap: Rs 539,856 crore, Rating: Overweight) delivered an in-line performance in Q3 FY25. While revenues were in line, margins showed strength. The company upped its full-year guidance, although the same was largely on account of an acquisition. What clearly stole the show was the commentary on demand and discretionary spending although Q4 is expected to be a tad soft. While the stock has outperformed the Nifty by a huge margin in the past year and has been a winning idea within the IT pack, the current volatility presents an opportunity to add the stock to ride the technology up-cycle.

In line Q3 FY25

Source: Company

Revenue – steady show

HCL Tech reported a sequential Constant Currency (CC) revenue growth of 3.8 percent, thanks to the strong seasonality from HCL Software during the quarter. The service revenue growth of 2.2 percent sequentially was driven by Engineering R&D.

Source: Company

The key markets of Americas and Europe delivered strong growth. In terms of industry verticals, financial services, technology, retail CPG, and telecom media showed good growth. Out of its seven industry verticals, except for life sciences, healthcare and public services, others are showing signs of improving demand. HCL Software contracted by over 2 percent YoY as some renewals and deal closures did not happen in the quarter.

The company has upped the full-year revenue guidance in Constant Currency from 3.5-5 percent to 4.5-5 percent. Around 50 basis points of the addition is attributed to the acquisition of Communication Technology Group from Hewlett Packard.

The guidance implies Q4 organic service revenue growth of minus 1.3 percent to 0.6 percent. The softness despite the absence of furloughs is due to the completion of a large project in retail in Q3 and a mega telecom deal ramp-down in Q4.

Margin – surprised positively

The performance on the margin front was a clear positive surprise with a sequential uptick of 93 basis points, thanks to HCL Products recording its highest-ever EBIT margin. While a sequential contribution of 114 basis points to margin came from software, there was a drag of 22 basis points in services. Thanks to efficiency gains from Project Ascend and forex impact, HCL was able to offset the drag from wage hike, furloughs, and acquisition cost. We feel growth remains a key lever for margin improvement going forward, although the company has guided margin in the band of 18-19 percent for FY25.

Source: Company

Steady inflows and robust pipeline

Order inflows were steady with the company bagging 12 deals – 7 in services and the rest in software. The demand environment is steadily improving and short-cycle orders are coming back. Hence, the company's ACV (annual contract value) is showing strength – up 23 percent YoY and 9 percent sequentially, which should support revenue.

Source: Company

The management alluded to an all-time high deal pipeline and expects good bookings in the coming quarters. It has done an excellent job in client mining and has gained out of vendor consolidation. The performance of the top accounts has been much ahead of the company average.

Source: Company

The net addition to people as well as hiring of freshers were positive. The attrition rate inched up a bit, thanks to the gradually improving demand.

The strength in the outlook

The management's commentary was laced with optimism and confidence on demand gaining strength, discretionary spending reviving, shorter deals making a comeback, and decision-making cycle shortening. HCL Tech expects companies to increase their IT spending budgets in 2025 and Gen AI is becoming more real than ever before in almost every deal.

Despite its outperformance, the current volatility is a good time to add the stock to ride the demand revival. The stock has reacted negatively to soft Q4 and miss on HCL Software and this opens up an opportunity to accumulate.

Source: Company, Moneycontrol Research

Key risks: Severe curtailment in IT spending due to macro slowdown in developed countries

Research Report by Madhuchala, Network 18

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Trade Cycles

The four important features of Trade Cycle are (i) Recovery, (ii) Boom, (iii) Recession, and (iv) Depression!

The trades cycle or business cycle are cyclical fluctuations of an economy. A full trade cycle has got four phases: (i) Recovery, (ii) Boom, (iii) Recession, and (iv) depression. The upward phase of a trade cycle or prosperity is divided into two stages—recovery and boom, and the downward phase of a trade cycle is also divided into two stages—recession and depression.

Phases of Trade Cycle:

The phases of trade cycle are explained with a diagram:

(1) Recovery:

In the early period of recovery, entrepreneurs increase the level of investment which in turn increases employment and income. Employment increases purchasing power and this leads to an increase in demand for consumer goods.

As a result, demand for goods will press upon their supply and it shall, thereby, lead to a rise in prices. The demand for consumer’s goods shall encourage the demand for producer’s goods.

The rise in prices shall depend upon the gestation period of investment. The longer the period of investment, the higher shall be the price rise. The rise of prices shall bring about a change in the distribution of income. Rent, wages, interest do not rise in the same proportion as prices.

Consequently, the margin of profit improves. The wholesale prices rise more than retail prices. The prices of raw materials rise more than the prices of semi-finished goods and the prices of semi-finished goods use more than the prices of finished goods.

(2) Boom:

The rate of investment increases still further. Owing to the spread of a wave of optimism in business, the level of production increases and the boom gathers momentum. More investment is possible only through credit creation. During a period of boom, the economy surpasses the level of full employment and enters a stage of over full employment.

(3) Recession:

The orders for raw materials are reduced on the onset of a recession. The rate of investment in producers’ goods industries and housing construction declines. Liquidity preference rises in society and owing to a contraction of money supply, the prices falls. A wave of pessimism spreads in business and those markets which were sometime before sellers markets become buyer’s markets now.

(4) Depression:

The main feature of a depression is a general fall in economic activity. Production, employment and income decline. The prices fall and the main factor responsible for it is, a fall in the purchasing power.

The distribution of national income changes. As the costs are rigid in nature, the margin of profit declines. Machines are not used to their full capacity in factories, because effective demand is much less. The prices of finished goods fall less than the prices of raw materials.

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..BANKING TERMINOLOGY

There are various types of Banks: PSU Banks, Private Banks, Co-operative/Regional Banks, Small Finance Banks and Foreign Banks. When you deposit money in a bank, let's say the bank gives you an interest rate of 4%. But when the bank lends out this money, they lend it out at say, 12%. The difference of 8% in the above scenario is effectively the profit of the bank! The loans that do not pay interest for 90 days are known as Non-performing Assets. Banks have to provide for such bad loans. Structure of a Bank Asset for a Bank: The asset portion of a bank's capital includes cash, government securities, and interest-earning loans (e.g., mortgages, letters of credit, and inter-bank loans). Liabilities for a Bank: The bank's main liabilities are its capital (including cash reserves and, often, subordinated debt) and deposits. The latter may be from domestic or foreign sources (corporations and firms, private individuals, other banks, and even governments). Banks are required to maintain Liquidity with the Reserve Bank of India: SLR (Statutory Liquidity Ratio): It is the money a bank needs to preserve in the form of cash, gold or government Bonds before providing credit customers. This limitation is added by RBI on banks to make funds available to customers on-demand at your earliest convenience. Banks are required to maintain SLR at 18%. CRR (Cash Reserve Ratio): Banks are required to hold a certain proportion of their deposits in the form of cash. Banks don’t hold these as cash with themselves, but deposit such amounts with RBI / currency chests. CRR rate is at 4.5% currently. Repo Rate: The rate at which the RBI lends short-term money to the banks. The RBI through its Monetary Policy committee changes the repo rate to balance growth and Inflation. Reverse Repo rate: The rate at which banks park their short-term excess liquidity with the RBI. Now let us understand various terminologies for Banks Net Interest Income (NII): This is the spread the bank makes on its lending. It is calculated as Interest Income – Interest Expended Net Interest Margin (NIM): This is the spread the bank makes on its lending. It is the earning which is left after deducting the cost paid to depositors from its yields on Loans. This is denoted in % terms. The formula is Yield on Loans – Cost of funds Capital Adequacy Ratio (CAR): The capital adequacy ratio (CAR) is a measure of a bank's available capital expressed as a percentage of a bank's risk-weighted credit exposures. Essentially, it is the Capital that is available to lend. Tier I Capital – In simple words this capital is freely available with the bank to lend out. Tier II Capital- This is the capital tied up somewhere and is less freely available to lend. In case of an adverse event, the bank can use this capital to lend. Under Basel III norms, a bank’s tier 1+tier 2 capital must be a minimum of 8% of its risk-weighted holdings. The minimum capital adequacy ratio, also including the capital conservation buffer, is 10.5%. Current Account Saving Account (CASA)- There is no interest paid on the Current Account and a small interest rate is paid on a savings account. The combination of both is called CASA which shows the liabilities of the bank on which it pays relatively less interest. Deposits: Bank deposits are a savings product that customers can use to hold an amount of money at a bank for a specified length of time. In return, the financial institution will pay the customer the relevant amount of interest, based on how much they choose to deposit and for how long. Now let us come to NPA. Gross NPA (GNPA): It is the total loans on which no payment has been paid for 90 days or more. GNPA % is usually shown in each Bank’s quarterly results. The percentage is basically the GNPA amount as a % of the total advances. Slippages: Slippages denote the fresh amount of loans that have turned bad in a year. The slippage ratio of a bank is calculated as Fresh accretion of NPAs during the year /Total standard assets at the beginning of the year multiplied by 100. Provisioning Coverage Ratio (PCR): This is the ratio of provisioning to GNPA and indicates the extent of funds a bank has kept aside to cover loan losses. For Instance, a company has GNPAs of Rs 100 and they have set aside 50 Rs, then the PCR is 50%. Net NPA (NNPA): The total figure left after deducting provisions made for bad loans from GNPA. (GNPA – Provisions+upgrades/writeoffs = NNPA) Special Mention Account (SMA) SMA-0 is a category in which stress with respect to the principal and interest has remained overdue for a period of 0 to 30 days. SMA-1 is a category in which stress with respect to the principal and interest has remained overdue for a period of 30-60 days. SMA-2 is a category in which stress with respect to the principal and interest has remained overdue for a period of 60-90 days

..... . VALI disclosures . .....

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Wednesday, January 15, 2025

15/01/25, HCL TECH Q3 results

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