HCL Tech, founded in 1976, headquartered in Noida, India, is a global technology company providing digital, engineering, cloud, and AI-powered solutions to its clients through a broad portfolio of technology services and products. The company, with over 218,000 employees, caters to clients across diverse industries including Financial Services, Life Sciences and Healthcare, Manufacturing, Technology and Services, Telecom and Media, Retail, and Public Services. Segment-wise, the IT & Business services contributed 73% of sales in FY24 (ended March 2024), Engineering and R&D services (16%), and HCL software (11%). Geographically, Americas contributed 58%, Europe 27%, India 3%, and the remaining 12% from other countries.

Key deal wins backed by encouraging signs from the sector

Green shoots are beginning to emerge for demand for IT services and solutions, following a period of challenging economic environment that curtailed clients' discretionary spending on non-core projects. The medium-term to long-term picture of IT majors including HCLTech looks promising as the evolving landscape and newer technologies such as GenAI provide significant opportunities to unlock. Accordingly, the company has been leveraging the opportunities presented and has own 20 key deals (12 deals from Services and 8 deals from Software) in 2QFY25. As a result, the total new booking TCV stood at USD2.2bn during the period.

Driven by a positive business outlook, HCL Tech has revised its lower end of revenue guidance from 3% to 3.5% for FY25 (ending March 2025) and now expects revenue growth to be in the range of 3.5-5% YoY in constant currency (cc) terms. The revenue growth from the Services business is also anticipated to be between 3.5-5% YoY in cc. However, the EBIT margin guidance remains unchanged and is expected to be between 18.0 to 19.0%.

Consistent dividend payout, backed by solid performance

HCL Tech steadily increased its revenue from operations over the last four years, growing it at a CAGR of over 11% to INR1,099.1bn in FY24. The positive performance trajectory over the years has led to an increase in the bottom line for the company. Net income grew at a CAGR of 9.2% to INR157bn over the same period, which eventually propelled earnings per share (EPS) to grow at an impressive CAGR of 9.2% to INR57.9 in FY24, from INR40.8 reported in FY20. Complementing the positive profitability performance, cash flow from operations also demonstrated an increase of over 1.7x to INR225.9bn, boosting the cash profile of the Group. Consequently, there has been a marked reduction in total debt by 27.5% to INR57.7bn as on FY24 end, compared to INR79.5bn as on FY20 end.

However, HCL Tech’s peers Tata Consultancy Services (TCS) and Infosys Limited (INFY) fared better, growing their EPS by a CAGR of 9.9% and 11.5%, respectively, over the period FY20-24. On the debt front, TCS’ total borrowings remained almost flat at INR80.2bn as on FY24 end, compared to INR81.74bn as on FY20 end, whereas INFY’s total debt surged over 81% to INR 83.5bn as on FY24 end.

HCL Tech’s revenues increased 8.2% YoY (2.9% QoQ) to reach INR288.6bn in 2QFY25. In cc terms, the revenues demonstrated an increase of 6.2% YoY and 1.6% QoQ. The revenue from the Services business grew 5.9% YoY and 1.6% QoQ in cc to INR260.9bn, with digital revenue contributing 38.5% of the mix. The operating profit grew 8.7% YoY to INR53.6bn, while the margins remained broadly stable at 18.6%. The company delivered decent bottom-line performance, growing the net income by 10.5% YoY to INR42.4bn with net margins rising over 30 basis points (bps) to 14.7%.

Backed by positive fundamentals, the company has consistently rolled out quarterly dividends for the last 22 years. Consequently, the management has declared an interim dividend of INR12 per share in 2QFY25. The company paid a full-year dividend of INR52 per share in FY24, representing a high yield of 3.4% and a payout of 89.6%.

Stock prices on an upward trajectory tracking fundamentals

HCL Tech is currently trading at a P/E ratio of 30x (based on estimated FY25 EPS of INR63.9), which is comparatively lower to its peer valuation – Tata Consultancy Services at 30x and Infosys Limited at 30x. However, the company is trading at higher P/E levels compared to its 10-year historical average of 23x. Valuation through the EV/EBITDA approach also projects a comparatively lower valuation for HCL Tech at 19x, compared to 21x for Tata Consultancy Services, and 19x for Infosys Limited. Tracking the positive performance and the broad-based market rally, the stock has delivered returns of over 42% in the past one year, and over 4% in the past one month. Further, the stock has performed well in December, rising over 6.5% to date. A total of 42 analysts have covered the stock with 9 of them having a ‘Buy’ rating and 9 having an ‘Outperform’ suggestion, with an average consensus target price of INR1,889. However, the run-up in stock prices over the past one year means the target price has already been met with no upside potential in the near term. Any correction in the near term might, coupled with favorable valuations might make the stock an interesting proposition for investors to evaluate.

Overall, HCL Tech looks fundamentally strong from a long-term perspective, driven by its solid performance trajectory, strong balance sheet position and focus on creating shareholders' wealth through a sustained dividend program. The anticipated gradual recovery of the sector also paints an encouraging outlook for the company, as evidenced by its guidance revision. However, the rapid transformation of the technological landscape also brings with it challenges including threats from emerging technologies like GenAI to the existing business model. Moreover, with a global footprint in 60 countries, the company is exposed to currency fluctuations, which can impact revenue.