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Vendor consolidation opportunity likely provides growth potential…

About the stock: HCL Technologies (HCLT) offers IT, ER&D and products to BFSI, retail, health, telecommunication, manufacturing, media & hi-tech verticals.

* HCL Tech has 250 Fortune 500 and 650 global 2000 clients

* It has grown organically and inorganically (13% CAGR over FY17-22)

Q3FY23 Results: HCLT reported strong numbers aided by P&P.

* The company reported 5% QoQ in CC terms while IT services grew 2.1% QoQ in CC terms. P&P grew 30.5% QoQ in CC terms due to seasonality

* EBIT margin at the company level grew ~160 bps QoQ to 19.6%

* Reported steady TCV of US$2.3 billion (bn), down 1.6% QoQ & up 9.9% YoY

What should investors do? HCLT’s share price has grown by ~2.3x over the past five years (from ~| 458 in January 2018 to ~| 1,055 levels in January 2023).

* We maintain our BUY rating on the stock

Target Price and Valuation: We value HCLT at | 1220 i.e. 19x P/E on FY25E EPS.

Key triggers for future price performance:

* The company continues to win multiyear deals in Cloud transformation, cyber security, etc, as new deal bookings continue to be strong

* Revenue guidance of 13.5-14% revenue growth in CC for FY23E at the company level & IT services guidance of 16-16.5% provided visibility for steady growth

* Revival of P&P business is critical as it is a high margin business

* With improvement in large deal wins, vendor consolidation opportunity, expansion in geographies, investment in sales & capabilities, we expect HCLT to register 12.3% CAGR in revenues over FY22-25E

Alternate Stock Idea: Apart from HCLT, in our IT coverage we also like TechM.

* Key beneficiary of uptick in communication spend

* BUY with target price of | 1,240

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