Motilal Oswal has given Buy recommendation for HCL Technologies recommended buy rating on the stock with a target price of Rs 1690 in its research re with a target price of Rs. 1690 in its research report issued on Jan 15, 2022

Motilal Oswal’s research report on HCL Technologies

HCLT delivered an exceptionally strong revenue growth of 7.6% QoQ CC in 3QFY22, 310bp above our estimate, led by its troubled Products and Platforms (P&P, +24.5% QoQ) vertical, which did exceptionally well despite benefitting from seasonality and deal spill over from 2QFY22 (600bp impact). Its Services verticals (IT Services/ER&D up 4.7%/8.3% QoQ CC) continued to clock strong growth and was ahead of our estimate. HCLT reported strong new deal TCV of USD2.1b (flat QoQ, +64% YoY). EBIT margin at 19% (flat QoQ) missed our estimate by only 40bp, but was impacted by large variance in the margin of IT Services (down 220bp QoQ) and P&P (up 12.5pp). The management reiterated its double-digit USD revenue growth guidance (including P&P growth of 0-1% YoY), but reduced its margin guidance to the lower end of 19-21% band (with a 10-20bp downside buffer). Its topline delivery in 3QFY22 is encouraging and supports our view that its three business lines are well positioned in a strong demand environment. Its Services business (IT+ER&D) – up over 5% QoQ for the second straight quarter – should gain from the strong momentum in Cloud migration and R&D outsourcing. TCV growth of 45% YTD and front ended employee addition (up 5.3% QoQ in 3QFY22) also point to robust growth.

Outlook

Given its deep capabilities in the IMS space and strategic partnerships, investments in Cloud, and Digital capabilities, we expect HCLT to emerge stronger on the back of an expected increase in enterprise demand for these services. The stock is trading ~23x FY23E EPS, which offers a margin of safety. Our TP is based on 25x FY24E EPS. We maintain our Buy rating.

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