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Maintain BUY on HCL Technologies - Deal wins to boost growth - HDFC Securities

Posted On: 2021-10-18 11:43:52 (Time Zone: IST)

Mr. Amit Chandra, Institutional Research Analyst, HDFC Securities and Mr Vinesh Vala, Institutional Research Analyst, HDFC Securities

We maintain BUY on HCL Tech (HCLT), supported by strong growth in services (+5.2% QoQ CC) and healthy deal wins. The miss in P&P (-8% QoQ) is a one-off, from which it should recover in Q3. Key attributes that support our positive outlook include (1) strong growth momentum in ER&D services (+5.4 QoQ CC), supported by life-sciences and hi-tech verticals; (2) healthy growth in IT & BS segment and expected recovery in P&P business; (3) large deal momentum (thirteen large services deals and one product win) with 38% YoY growth in Q2 new TCV at USD 2.25bn; (4) strong client mining (one client added in USD 100mn and 12 clients in USD 50mn bucket); and (5) the highest ever headcount addition in the past six years (11,135 net addition in Q2), which is leading to better visibility. HCLT has lowered its P&P guidance (0-1% vs. mid-single-digit) due to the miss in Q2; however, the overall guidance of double-digit growth is unchanged. Its new payout policy of distributing at least 75% of net income is encouraging. We have increased the EPS estimate for FY23/24E by +2.6/3.4%. We maintain our BUY rating with a target price of INR 1,450, valuing the HCLT stock at 20x Dec-23E EPS, factoring in 12/14% CAGRs in revenue/EPS over FY21-24E.

Q2FY21 highlights: (1) HCLT's revenue growth of 3.5% QoQ CC came in slightly below our estimates (+3.8% QoQ). (2) The IT&BS segment grew +5.2% QoQ CC (led by app modernisation and cloud transformation), ER&D saw robust growth of +5.4% QoQ CC (led by digital engineering) and products & platform continued to decline -8% QoQ CC, impacted by deal deferment. (3) Among the verticals, growth was led by manufacturing (+8.1% QoQ CC) and life-sciences (+7% QoQ CC), which offset the flattish growth in financial services and retail & CPG. (4) HCLT reported a new TCV of USD 2.25bn (+38% YoY), which includes thirteen large services deal wins and one product win. (5) EBIT margin declined 63bps QoQ to 19%, largely impacted by a decline in P&P business and FX headwind. (6) HCLT reiterated its double-digit revenue guidance (CC terms) and the EBIT margin band of 19-21% for FY22E. (7) It announced a payout policy of not less than 75% of net income.

Outlook: We have factored in USD revenue growth at +12.2/13.3/11.5%, IT&BS growth at +15/14/12%, ER&D growth at +12/13/12%, and P&P growth at +0/6/7% for FY22/23/24E respectively. EBIT margins are estimated at 19.4/20.5/20.7% over the same period, translating into an EPS CAGR of 14% over FY21-24E (TCS/INFY/WPRO at 14/14/15% CAGR). Valuation, at ~18x FY24E, is inexpensive with ~5% FCF yield and ~25% RoIC.

Shares of HCL Technologies Limited was last trading in BSE at Rs. 1250.90 as compared to the previous close of Rs. 1265.70. The total number of shares traded during the day was 473122 in over 27010 trades.

The stock hit an intraday high of Rs. 1293.00 and intraday low of 1244.35. The net turnover during the day was Rs. 595406956.00.

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