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Buy HCL Technologies Ltd For Target Rs. 1110

Healthy deal wins, guidance key positives…

HCL Tech’s results were below our expectations. However, the company won 19 transformational deals across industry verticals. New deal TCV in this quarter increased 49% YoY at US$3.1 billion and 18% YoY to US$7.3 billion in FY21. Further, in terms of guidance, HCL expects to grow in double digits in constant currency for FY22E and expects EBIT margin to be between 19.0% and 21.0% for FY22E. The company has declared a dividend of | 6/share. Also, the board has declared a special dividend of | 10/share.

Revenue trajectory to improve in coming years

The company plans to tap the US$300 billion cloud opportunity by 2023; considering the company’s expertise in Infrastructure Management Services (IMS) & app modernisation and focus on integrated deals. The company expects healthy double digit growth in revenues in FY22E mainly led by improved growth in IT & business services and ER&D (the company believes it has bottomed out and will see growth from here on).

In terms of products & platforms HCL expects 75% of products to grow at a healthy pace but the company expects 25% of product to grow at single digit. This, coupled with improvement in large deal wins, expansion in other geographies, investment in sales & capabilities, inorganic growth and opportunities in captive carve outs make us positive on the company’s revenue trajectory in the long term. Hence, we expect dollar revenues to increase at a CAGR of 11.7% in FY21-23E.

Despite investment we expect margins to expand

EBITDA margins in Q4FY21 declined 517 bps QoQ mainly led by wage impact for senior members of team ~60 bps, seasonal decline in product and platforms, impairment & increased investment in sales in product & platforms ~73 bps and lower utilisation ~61 bps, forex ~21 bps and rest due to one-time bonus. Going forward, the company plans to invest in expanding geographies, investment in sales, product engineering, invest in talent and wage hikes. Despite considering these headwinds, we expect the company to easily surpass the top end of guided margins in FY22E due to rupee depreciation, lower travel cost and operating leverage due to revenue growth. Hence, we expect margins to increase 100 bps in FY21-23E.

Valuation & Outlook

The company witnessed healthy new deal wins (up 18% YoY to US$7.3 billion in FY21). This, coupled with traction in cloud & cloud related services, expansion in other geographies, investment in sales, inorganic growth and opportunities in captive carve outs makes us positive on HCL’s revenue trajectory in the long term. Hence, we maintain BUY on the stock with a target price of | 1,110 (18x PE on FY23E EPS) (earlier target price | 1150).

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