Buy HCL Technologies; target of Rs 585: ICICI Direct

ICICI Direct's research report on HCL Technologies

HCL Tech reported 0.8% QoQ growth in dollar revenues in constant currency terms, despite a challenging quarter. Revenue growth in the quarter was driven by the digital business, which grew 7.1% QoQ in the quarter. Margins also improved 64 bps and were above our expectation.

Outlook

HCL Tech reported a healthy quarter from the perspective of margin expansion. We expect the company to see near term revenue and margin pressure led by Covid-19 pandemic. However, in the long-term, considering opportunities in cloud consumption, cyber security, automation, app modernisation, we remain optimistic on its revenue trajectory. Additionally, easing of seasonality pressure in the products & platforms business within IBM driven by renewals would ensure growth. In addition, HCL Tech is also looking at captives, acquisition and vendor consolidation as revenue drivers, going forward. Further, we expect various cost rationalisation measures of the company to bear fruit in FY22E. This, coupled with reasonable valuation of 11x, prompt us to upgrade the stock to BUY recommendation with a target price of Rs 585/share (~13 x FY22E EPS).