Buy HCL Technologies Ltd For Target Rs.970 - HDFC Securities
Growth vectors intact
We maintain BUY on HCL Tech (HCLT), based on broad-based 2Q performance and multiple growth vectors. HCLT’s prowess in cloud infra business is a strong competitive advantage with enterprises accelerating cloud adoption and higher annuity streams supported by P&P upside. The positive outlook is also predicated on (1) strong deal wins with TCV up 35% QoQ, supported by 15 transformational wins (eight in life-science & healthcare vertical) and pipeline at an all-time high, (2) strengthening partner ecosystem with hyperscalers increasing the addressability and client access, (3) continued traction in P&P business with cross-sell opportunities (>12,000 unique customers signings), supported by upgrades/launches (Unica/DRYiCE in 2Q). The absence of large acquisitions and subsequent accretion to FCF/payout are the upside risks to valuations. HCLT is among our top picks in the sector, and our target price of Rs 970 is based on 18x Sep-22E EPS.
* 2QFY21 highlights: (1) HCLT’s revenue came in higher than estimated at 6.4% QoQ (4.5% QoQ CC), supported by +4.9% QoQ CC in IT & BS, +3.6% QoQ in ER&D and +3.1% QoQ in P&P segment. (2) Growth was broad-based across the verticals with LS/Retail/Tech/TME delivering 8.6/8.4/6.3/6.1% QoQ respectively (CC terms). (3) Revenue guidance retained at +1.5% to +2.5% QoQ (CC terms) over 3Q-4QFY21E while EBIT margin guidance is revised upward by 50bps to 20-21% for FY21E.
* Outlook: We have factored in USD revenue growth at +1.2/11.8/10.1%, factoring in IT & BS growth at -0.6/+12.4/+10.4%, ER&D growth at - 4.4/+11.4/+10.1% and P&P growth at +20.4/9.3/8.4% over FY21/22/23E respectively. EBIT margins are estimated at 20.6/20.7/20.6% over the same period, translating into an EPS CAGR of 12.4% over FY20-23E (TCS/INFY at 11/14% CAGR).
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