Mr. Apurva Prasad, Institutional Research Analyst, HDFC Securities and Mr. Amit Chandra, Institutional Research Analyst, HDFC Securities
We maintain BUY on HCL Tech (HCLT) despite a sub-par Q1, as we expect steady upward progression ahead. Key attributes that support our positive outlook include (1) strong growth momentum in ER&D services (+4.3 QoQ CC) supported by life- sciences and hi-tech verticals; (2) recovery in IT & BS segment ahead, led by integrated apps and infra deals; (3) large deal momentum (eight large services deals and four product wins) with 37% YoY growth in Q1 new TCV; (4) geographical focus on new frontier markets with leadership augmentation; and (5) healthy headcount addition (7,522 net addition in Q1 and ~20k including sub-con over the past two quarters). The absence of mega deals (rebadging) and P&P restructuring (low to mid-single digit growth in FY22) have led to HCLT trailing peers in FY22E. High visibility of FY22E growth is supported by USD 4.8bn new wins in the past six months and stable renewals. We maintain our BUY rating with an unchanged target price of INR 1,185, valuing the HCLT stock at 20x Jun-23E EPS, factoring in 11/13% CAGRs in revenue/EPS over FY21-24E.
Q1FY21 highlights: (1) HCLT's revenue growth of 0.7% QoQ CC came in below our estimates (+2.2% QoQ). (2) IT&BS segment remained flat QoQ (+0.3% QoQ CC), ER&D saw robust growth of +4.3% QoQ CC (led by digital engineering and life-sciences vertical) and products & platform declined 1% QoQ CC, impacted by the exit from the IP partnership (Celerit). (3) Among the verticals, growth was led by life-sciences (+5.4% QoQ CC) and financial services (+2.9% QoQ CC), which offset the decline in manufacturing (-2.2% QoQ CC), telecom (-1.9% QoQ CC) and public services (-3.4% QoQ CC). (4) HCLT reported new TCV of USD 1.6bn (+37% YoY), which includes eight large services deal wins and four product wins. (5) EBIT margin declined 67bps QoQ to 19.6%, impacted by COVID-related expenses, hiring costs, and investment in new markets, which were partially offset by FX tailwinds and lower amortisation costs. (6) HCLT has maintained its double-digit revenue guidance (>10%) and the EBIT margin band of 19-21% for FY22E.
Outlook: We have factored in USD revenue growth at +11.6/10.8/10.7%, IT&BS growth at +13/11/11%, ER&D growth at +11/12/12%, and P&P growth at +4/7/7% over FY22/23/24E respectively. EBIT margins are estimated at 20.0/20.5/20.5% over the same period, translating into an EPS CAGR of 13% over FY21-24E (TCS/INFY/WPRO at 14/13/15% CAGR). Valuation at <17.5x FY23E is inexpensive with ~6.5% FCF yield and 25% RoIC.
Shares of HCL TECHNOLOGIES LTD. was last trading in BSE at Rs. 977.3 as compared to the previous close of Rs. 1000.2. The total number of shares traded during the day was 570227 in over 22111 trades.
The stock hit an intraday high of Rs. 1008 and intraday low of 969.5. The net turnover during the day was Rs. 558043703.