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Published on 8/01/2021 12:25:54 PM | Source: Samco Securities Ltd

Update On HCL Technologies Ltd By Samco Securities

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Posives

Value Accreve for Minority Shareholders: A healthy 5-year average ROE of 25% and an average dividend payout rao of 25% make this Company extremely aracve from a shareholder's perspecve. Addionally, it connues to be undervalued among peers with a PE of 21x against industry PE of 32.7x, despite strong returns. Therefore, the stock price is expected to catch-up with earnings going forward.

 

Deal Levers to Drive Momentum: HCL Tech won 15 transformaonal deals in Q2FY21 and showed excellent 20% QoQ growth in terms of deal wins which has accelerated growth momentum for the company. Infact, its order pipeline has seen a significant rise on a QoQ basis as technology takes priority for companies globally. Q1FY21 also showed a 40% jump in order wins and HCL Tech with its sound capabilies is expected to seize more opportunies while garnering a strong topline.

 

Strong Business Tailwinds: Mode 2 digital and mode 3 product business segments currently contribute to 36.7% of revenue. With exposure to new age technologies, these segments outperformed during the pandemic which led to EBIT margins of 18.5% and 28.7% respecvely in Q2FY21. In order to improve the service mix, the company is focusing on addional investments through various acquisions in these segments. This provides HCL Tech an edge among IT players amidst a wave of digital adopon.

 

Strategic Collaboraons: With over a 100 collaboraons with companies including a broad alliance with Google Cloud to strengthen its go-to-market strategy and an acquision of Australia-based DWS Ltd to capture business in Australia and NZ, will help the Company acquire niche capabilies across vercals which will further fuel growth.

 

Qualies of a Mulbagger: HCL Tech has a track record of excellence with a CAGR growth of 21% in sales in the past 10 years, PAT CAGR of 25%, Stock price CAGR of 23% and average OPMs of over 20% in the same period. In the technology pack, this is a gem of a stock for long term investors to compound wealth.

 

Risks

Margin Pressures: While impressive, HCL Tech's operang margins connue to lag the tech biggies such as Infosys and TCS which are in the range of 27-30%. Moreover, HCL Tech's arion rate is sll higher compared to its peers. Also, any issues in integraon through acquisions during implementaon/ scale up could lead to further deterioraon of these metrics.

 

Employee Cost Pressure: 33% of HCL Tech's employees in the US are visa dependent. New regulaons entail a substanal increase in wages as visas come in for renewal which could have an impact on employee costs going ahead. Some impact of this is expected to be seen in FY21 to some extent.

 

Risk from USD depreciaon: HCL Tech has benefied from dollar's appreciaon as majority of its revenue (63%) is from the US. With the expectaon of the dollar to connue its downward journey vis-à-vis other emerging currencies, this company is expected to be on a back foot.

 

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