Buy HCL Technologies Ltd For Target Rs.1,010 - HDFC Securities
HCL Tech won 15 transformational deals in Q2FY21 vs. 11 transformational deals in Q1FY21 and 14 transformational deals in Q4FY20 and its deal pipeline remains strong. The pace of contract renewals has been healthy and the pipeline has several large deals, according to the firm. In the post Covid-19 pandemic, the company could see improved traction in cloud consumption, cyber security, automation. Beyond FY21, there could be a faster adoption of digital services across industries, where HCL Tech is well-positioned to benefit from. We are impressed with execution, expansion of digital competencies and flow of large and mega-deal wins by HCL Tech.
HCL Tech’s investments over the last few years in next-gen technologies have helped to sustain in good stead during these difficult times and positioned strongly to leverage the emerging market opportunities. This growth momentum was driven by its continued leadership in digital transformation and cloud businesses, and a strong stability in the products and platforms segment, all of which continue to open diverse growth avenues. Company has maintained its revenue guidance for the remaining two quarters of FY21expects revenue to increase sequentially by an average 1.5-2.5% in constant currency in third and fourth quarters as well as for FY21. The company, however, has raised its EBIT margin guidance to 20-21% from 19.5-20.5% forecast earlier.
On July 06, 2020, we had issued a buy on HCL Technologies Ltd at Rs 579 for base case Target of Rs 633 and bull case Target of Rs 668. The stock achieved its base case target on 16th July 2020 and bull case target on 24th July 2020. Company had recorded robust performance in Q1FY21 and Q2FY21 and its H2FY21 result is expected to be strong too. Taking into the consideration of its strong revenue and margin guidance, we are re-initiating coverage on the stock.
Valuations and Recommendations:
Company has a good track record in client acquisitions and engaging in vendor consolidation opportunities over the recent past. HCL Tech signed 53 transformative deals this year and US$100+ Mn clients increased by 5, from 10 to 15 (on YoY basis). HCL Tech has built up capabilities in UX design and has strong presence in data science and engineering. Further, taking into the consideration opportunities in cloud consumption, cyber security, automation, app modernisation, we remain optimistic on HCL Tech’s revenue and margin trajectory as well as cost rationalisation efforts going forward.
HCL Tech has high skew towards IMS, which gains from cloud, cybersecurity, networks and WFH enablement demand. It hasstrong presence in ER&D (top-3 globally), which is showing first signs of recovery; and has margin accretive nature of products business, cushioning any pressure on IT services margins. HCLT can grow well led by capabilities in digital foundation, consistent mega deal wins and improving digital competencies. Its IT services business has improved in quality and is not overly reliant on IMS but better-rounded.
We think the Base case fair value of the stock is Rs 935 (18.5x FY22E EPS) and the bull case fair value of the stock is Rs 1010 (20.0x FY22E EPS) over the next 2 quarters. Investors can buy at LTP and add further on dips to Rs. 777-787 band (15.5xFY22E EPS. At the LTP of Rs 858.50, stock trades at 17.0x FY22E EPS.
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