Prabhudas Lilladher has given Buy recommendation for HCL Technologies with a target price of Rs. 1398 in its research report issued on Jan 16, 2022

Prabhudas Lilladher’s research report on HCL Technologies

HCLT reported strong beat on revenue with growth of 7.6% QoQ CC (Ple: 4.5%, 4.2%) led by strong growth in Products business (+24.5% QoQ CC) aided by recovery of $20mn slippages in Q2 and seasonal strength in this business in Q3. Revenue guidance of 0-1% YoY CC for Products remains intact indicating steep sequential decline in this business in Q4. ER&D (+8.3% QoQ CC) and IT Services (+4.7% QoQ CC) also reported strong growth. Strong new deal TCV of US$2.135 bn +64% YoY, strong deal pipeline (~10% QoQ, 20% YoY), continued strong headcount addition (+5.4% QoQ, 24% YoY) indicates IT Services and ER&D growth momentum will continue. Miss in EBIT margin at 19.0%, flat QoQ (Ple:19.3%, Cons:19.4%) was led by decline of 190bps QoQ in Services (IT + ER&D) margins due to wage hikes, supply side cost pressures, new project transition costs and seasonal leaves. This was offset by higher P&P margins (32%) led by revenue growth leverage.

Outlook

We have cut our estimates by -1.7%/-2%/+0.6% for FY22/23/24E led by cut in margin estimates. We estimate revenue growth of 13.1%/13.7%11.6% for FY22/23/24. We arrive at DCF based TP of Rs 1398 (implied target multiple of 21.1x on FY24 EPS). HCLT is currently trading at 23.4x/20.2x on FY23/24E EPS of INR 57.3/66.2 respectively with Revenue/EPS CAGR of 12.6%/16.3% over FY22-24E. Inexpensive valuations relative to the sector, strong TCV and headcount addition led us to maintain our Buy rating.

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