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Revenues impacted by Covid….

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

* HCL has grown organically and inorganically (14% CAGR over FY18-21)

Q1FY22 Results: HCLT reported weak Q1FY22 results.

* Revenue increased 0.7% QoQ in CC terms below our estimates

* EBIT margin was at 19.6% below our estimate of 20.5%

* Total net new deal TCV was at US$1664 million

What should investors do?

HCLT’s share price has grown ~3x over the past five years (from ~| 365 in Jul 2016 to ~| 982 levels in Jul 2021).

* However, weak Q1 and run up in price prompt us to downgrade from BUY to HOLD

Target Price and Valuation: We value HCLT at | 1110 i.e. 18x P/E on FY23E EPS

Key triggers for future price performance:

* 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

* Expects healthy double digit growth in revenues in FY22E mainly led by improved growth in IT & business services and ER&D

* Improvement in large deal wins, expansion in geographies, investment in sales & capabilities, we expect HCLT to register 11.7% CAGR in FY21-23E

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

* Key beneficiary of uptick communication spend

* BUY with target price of | 1,120

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