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HCL Technologies share price gained 2x in the last 5 years and made a return of 43% in the last 1 year despite the prevailing pressure in the overall IT sector because of slower growth in North America. No doubt, HCL Technologies share remained resilient even in such market scenarios.
North America is the top revenue contributor for major IT companies in India. HCL Technologies is no different and major revenue of 64.5% comes from America, 29% from Europe and just 6.4% revenue from rest of the world as of Q3 FY24. You can view the growth in both YoY and QoQ markets.
So, is there an opportunity to invest in HCL Technologies shares at current market price? In this blog, let’s analyze the company fundamentals to find out its potential in the long term.
Company Overview
HCL Technologies (HCLT) has a wide-ranging focus on digital, engineering, and cloud services. It operates through three main business units: IT and Business Services (ITBS), Engineering and R&D Services (ERS), and Products & Platforms (P&P). ITBS assists global enterprises in business transformation through services in applications, infrastructure, digital process operations, and advanced digital transformation solutions.
Financial Highlights of HCL Technologies
Revenue grew at 15% CAGR and Net Profit grew at 11% CAGR in the last 5 years.
You can view the trend of revenue and net profit growth from the income statement of HCL Technologies Ltd. from StockEdge.
Also, in FY 23 the company reported a year-on-year revenue growth of 18%. This significant rise in expenses led to lower growth in profits and Margins depleted. The Cash Flow has increased over the years. You can track the cash flow statement of HCL Technologies for the last 10 years at a glance, only from StockEdge.
The company reported a revenue of ₹28,446.0 crore during Q3 FY24, marking a 6.5% increase compared to the same period last year, with a net profit of ₹4,351.0 crore, reflecting a growth of 6.2%. Sequentially, both revenue and net profit witnessed significant increases of approximately 7% and 14%, respectively, driven by robust momentum across service and software businesses.
The company attributed this growth to strong performance in the telecom and Engineering and R&D verticals, particularly in the HCL software segment. Despite challenges such as wage hikes and furloughs, HCL managed to expand its EBIT margin by 20 bps YoY and 130 bps QoQ, showcasing improved efficiency and cost optimization.
Service revenue contributed around 88% to the total revenue, with IT & business services and Engineering and R&D services being the primary contributors. While the IT service grew by 1.9% QoQ and 4.3% YoY in constant currency (cc) terms, the Engineering service witnessed an even more significant growth of 8.7% QoQ and 3.6% YoY. The software business, constituting around 12% of revenue, exhibited remarkable profitability with operating margins of approximately 33%, driven by a surge in subscription and support revenue.
The company managed to secure new deals with a total contract value of $1,927 million, winning 18 large deals during the quarter, which included both service and software-related contracts. Furthermore, HCL added 3,617 employees and approximately 3,818 freshers during the quarter, bringing the total employee count to 2,24,756 as of December 31, 2023.
SWOT analysis of HCL Technologies share
We’ll conduct a SWOT analysis of the company to gauge its strengths, weaknesses, opportunities, and threats. This analysis will provide insights into the company’s competitive position and potential risks, aiding in making informed investment decisions.
Strengths
HCL Technologies, the third-largest listed Indian IT services provider by revenue, is also a key player in the Nifty 50 index. It has established a diverse industry-vertical portfolio. ERS specializes in offering engineering services and solutions covering all phases of product development and platform engineering. Meanwhile, P&P delivers modernized software products tailored to meet the technology and industry-specific needs of global clients. The company caters to various industry verticals including financial services, manufacturing, telecom, retail, life sciences, media and entertainment, and energy and utilities.
Weakness
HCL Tech’s geography-wise revenue trend is in line with the global IT services industry, with the US being the largest contributor to its revenues. It derives ~60% of its overall revenue from the US, exposing the company to the market’s structural and region-specific challenges. The slowdown in discretionary spending by clients continued, impacting revenue growth to some extent. Additionally, the impact of furloughs led to a decline in revenue contribution from the Rest of the World (ROW) region by 7.5% YoY in cc terms.
Opportunities
HCL Technologies has a positive outlook for the future. The company anticipates a cyclical trend change and is well-prepared for this section of the economic cycle as it moves forward. For the fiscal year 2024 (FY24), HCL expects revenue growth in the range of 6% to 8% and operating margins in the 18% to 19% range. The tax rate for FY24 is expected to be between 25.5%-26.5%. HCL aims to deliver industry-leading growth with an improving margin profile and will focus on efficient capital use, organic growth, cost structure right-sizing, utilization and pyramid streamlining.
Threats
A large part of the revenues being generated outside India, HCL Tech is exposed to foreign currency fluctuations. The company faces intense competition from its peers in the Industry such as TCS, Infosys, Wipro, and global players such as IBM and Accenture.
Although HCL has seen a decline in attrition rates, retaining top talent remains a challenge in the IT industry. The company needs to continue its efforts to attract and retain skilled professionals to maintain its competitive edge.
The Bottom Line
The momentum in revenue growth would continue in the coming year driven by growing clients, large deal wins, and expansion in geographies. Currently, a Positive view on HCL Technologies over the long-term horizon with improvement in large deal wins, investment in sales & capabilities.
Apart from HCL Technologies share, there are other opportunities for investment in the Indian IT sector companies. One such stock that may turn out to be a valuable investment opportunity. Find out in this blog; TCS Stock Analysis: Is it a Good Investment in 2024?
Happy Investing!
