Published on 14/08/2020 12:06:32 PM | Source: ICICI Securities Ltd

Buy HCL Technologies Ltd For Targe Rs.720 - ICICI Securities Ltd

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Better-than-expected recovery seen in FY21 guidance

HCL Technologies (HCLT) has reported a QoQ revenue decline of 7.2% in constant currency (CC) terms with IT & business services (IT&B) and ER&D segment declining by -7.8% and 9%, respectively. Organic revenue decline was 5.3% QoQ in Q1FY21. HCLT reinstated its guidance for FY21 with revenue expected to grow by 1.5-2.5% QoQ over the next three quarters with margins being in the range of 19.5-20.5% in FY21. As expected, the company is seeing increased traction in its technologies around digital workplace, cloud, collaboration and cybersecurity. The company signed 11 net transformational deals led by key industry verticals including telecommunication, financial services, manufacturing, life sciences and healthcare. The guidance is also supported by the fact that net-new booking is higher on a YoY basis during the quarter with robust renewals and a healthy pipeline. HCLT has also gained an increasing wallet share within its accounts in a tough environment by engaging with clients in their cost takeout initiatives and consolidation of vendors within its ecosystem. Maintain BUY.

* Multiple hits impacted Q1FY21 revenue and FY21 guidance. Revenue declined 7.2% QoQ in CC terms (growth of 1% on YoY basis) in Q1FY21, primarily on account of drop in volumes due to Covid-19 pandemic and right shoring within certain revenue profiles. Revenue is expected to grow in the range of 1.5-2.5% QoQ in CC terms in the next three quarters implying a revenue guidance of -2.3% to - 0.8% in FY21.

* Products and platform (P&P) performing well. P&P segment revenue declined 2.1% QoQ in CC terms in Q1 (overall decline 7.2%). The segment performed relatively well primarily on account of presence across multiple verticals, relatively shorter deal cycles, mission critical products, new demand and used cases developing around ecommerce retail (retailers increasing spend on ecommerce), digital marketing and security services (WFH requiring additional security). Mode 1/Mode2/Mode 3 services witnessed QoQ decline in CC terms of 9.5%/1.6%/4.7%, respectively.

* Margins surprised on the upside. EBIT margin declined 36bps QoQ to 20.5% (ISec: 18.7%) with key tailwinds being rupee depreciation (76bps), SG&A cost, optimisation (40bps) and key headwinds being increasing R&D spend and drop in volumes (70bps). Management is expecting margins to be in the range of 19.5- 20.5% in FY21.

* Maintain BUY. Pipeline was up 40% QoQ in Q1 with net new deal TCV intake also being up YoY and renewals remaining robust during the quarter driven by increased traction within lifescience, financial services, Hi-Tech, cloud and security offerings. HCLT is also seeing an increase in scope of vendor consolidation within stressed verticals such as Energy and Auto. Cash conversion was also healthy with FCF/EBITDA conversion at 125.5%. Net cash as of Q1FY21 stands at US$1.3bn (post paying ~US$800mn final tranche pertaining to acquisition of certain IBM assets) providing impetus in participating in complex deal structures around cost takeout initiatives and vendor consolidation. We retain BUY with a target price of Rs720 based on 15x Jun’22E EPS.


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