Research

HCL Technologies - Q4FY22 Result Update - Declining margin profile - Downgrade to 'ACCUMULATE'

Posted On : 2022-04-22 10:59:46( TIMEZONE : IST )

Ms. Aditi Patil, Research Associate at Prabhudas Lilladher.

Quick Pointers:

- FY23 EBIT margin guidance reduced to 18-20% (vs reported margin of 18.9% in FY22 and 19%+ margins pre-covid)

- FY22 new deal TCV is $8.3 bn, 14% YoY and ACV is higher by 21% YoY.

We downgrade HCLT to 'Accumulate' (earlier Buy) as we cut DCF based target price to Rs. 1169 (earlier Rs. 1295) led by 1) decline in margin profile, 2) volatility in P&P revenue dragging down overall revenue growth, 3) increase in risk free rate and 4) moderation in terminal growth rate. We cut EPS estimates by 4%/5% for FY23/24, led by cut in EBIT margin estimates by ~50-70 bps.

Q4 reported weak revenue (0.5% QoQ USD) due to decline in P&P business (-24.4% QoQ USD) and moderation in ER&D growth (3.5% QoQ USD). IT services revenue grew 4.6% QoQ USD. We believe growth in new deal TCV (14% YoY) and ACV (21% YoY) for FY23 is strong, but revenue guidance of 12-14% YoY for FY23 is lower due to volatility and declining trajectory of P&P (12% of total revenue). We anticipate recovery in P&P business to be slow because - 1) it is run as a software start-up and 2) 25% of P&P portfolio is declining in high double digit. Growth in ER&D business (16% of revenue) is also lower than ER&D peers for FY22.

We assign DCF based TP of Rs 1169 with implied target multiple of 19x (earlier 21x) on FY24 EPS. HCLT is currently trading at 20x/18x on FY23/24E EPS of INR 54.5/62.5 respectively with Revenue/EPS CAGR of 12.4%/12% over FY22-24E.

Shares of HCL Technologies Limited was last trading in BSE at Rs. 1099.60 as compared to the previous close of Rs. 1089.55. The total number of shares traded during the day was 112635 in over 9487 trades.

The stock hit an intraday high of Rs. 1105.00 and intraday low of 1081.30. The net turnover during the day was Rs. 123139660.00.