InvestorQ : What are the five major messages I can take from the HCL Tech Q1FY23 results?
Mitali Bhutta made post

What are the five major messages I can take from the HCL Tech Q1FY23 results?

1 month ago

HCL Tech announced results this week and post the results the stock touched a 52 week low. The overall sentiments surrounding IT is rather weak. Here is what you can take away from the HCL Tech results for Q1FY23.

1) New deals are driving growth with the total contract value (TCV) of new deal wins at $2.05 billion. Large deals showed robust 23% growth on a yoy basis. Clearly, it is digital that has emerged as a strong theme for HCL Tech with digital driven services growing by 2.3% on a sequential basis and 19% yoy. The growth in top line was largely about growth in digital engineering and digital application services.

2) Sadly, like other IT companies, attrition remains a problem for HCL Tech and that is hitting its operating margins hard. For Q1FY23 quarter, OPM stood at 17% while attrition rate surged from 21.9% to 23.8% QOQ. The YOY attrition rate has virtually doubled from 11.8% to 23.8%. The reason; sudden surge in demand for IT services has made qualified IT professionals a premium item. So, it adds to training and manpower costs.

3) Here is a quick look at what has driven top line growth. Here is a quick peak at the growth rate for HCL Tech at its top five verticals. The growth was 34.2% for Technology & Services, 29.2% for Telecom / Media, 19.1% for Manufacturing, 16.4% for Financial Services and finally 15.7% for Lifesciences & Healthcare. Despite the pressures on the bottom line, the top line growth has remained extremely robust and heartening.

4) Where is the business alpha coming from for HCL Technologies? The company is accelerating digital transformation journeys of clients and that is the key. Growth has been largely driven by digital engineering and digital application services with cloud adoption being a common and enduring theme across all the verticals. This is broadly in line with the changing demand of the clients where marginal demand is pure digital.

5) Finally, a look at the cash flows of HCL Technologies. Like most large IT companies, HCL Tech enjoys robust cash flows. The Operating Cash Flow (OCF) stood at a healthy $2.02 billion while free cash flow (FCF) for the period stood at $1.76 billion. The ratio of operating cash flow to Net Income was a highly competitive 112%.