Sanjiv Bhasin of IIFL and Dolat Capital's Karan Taurani believe that the company's Q2 performance was good and it can outperform peers like TCS and Infosys in the coming quarters.
In a weak environment for the IT sector, HCL Technologies has reported stable and better-than-expected earnings in the second quarter ended September 30. HCL Tech’s Q2 consolidated net profit surged 16.7 percent to Rs 2,015 crore (YoY), while dollar revenue was at USD 1,722 million. It has reiterated FY17 constant currency guidance at 12-14 percent and EBIT guidance to 19.5-20.5 percent.
Sanjiv Bhasin of IIFL is enthused about the company’s positive guidance on margins and volumes. He said HCL Tech’s inconsistency in margins saw peers Tata Consultancy Services (TCS) and Infosys get higher valuations, he told CNBC-TV18. IIFL is overweight on stocks such as HCL Tech and Wipro, he added.
Bhasin said HCL Tech can continue to outperform the sector. He added that a target price of Rs 900 in the next 6-9 months in on the cards.
Given the likes of TCS and Infosys expecting a growth of 7-8 percent, HCL Tech organically grew at 9-11 percent, said Karan Taurani of Dolat Capital. He expects the company will outperform peers in terms of stock performance.
Below is the verbatim transcript of Sanjiv Bhasin and Karan Taurani's interview to CNBC-TV18's Latha Venkatesh and Sonia Shenoy.
Latha: What are your first thoughts after you looked at the HCL Technologies numbers?
Bhasin: Two things stand out; one is the positive guidance for the next year on the margin front. You know HCL has been slightly inconsistent on the margin front and that is where you saw Tata Consultancy Services (TCS) and Infosys getting the higher valuation. Secondly, the guidance on the volume front is also a big positive coming on the back where you had the biggies actually disappoint. I would say very pleasing, the numbers and the guidance going ahead.
I think at 14 times it becomes a very reasonable stock to own in our portfolio. We have been overweight on HCL Tech and Wipro because of this 12-14 times price earnings. We think this inorganic/organic type of buyout which they have on the play - Wipro just announced a USD 500 million buyout and you just alluded that HCL is in the process of almost USD 600 million being used. So, as long as you are using the cash on balance sheet to grow the business. I think it is a big positive.
I think come November now you are more or less certain that the odds are in favour of Hillary Clinton and a lot of the rhetoric on Visa cost should also be tempered down which should be a positive for IT as a whole.
Sonia: Given that there has been more confidence with HCL Technologies numbers, two quarters in a row now they have performed, they have reiterated their margin guidance, do you get a sense that HCL Tech could outperform some of the larger peers especially peers like Tata Consultancy Services (TCS) purely because of the numbers that they have delivered this time?
Bhasin: It is a mix of basket of how the foreign allocations take place. They have been more or less overweight on all the sector and now they are seeing an underpinning because of weakness in the guidance. I think HCL Tech has been an outperformer. Look at the stock, from Rs 720 on bad results last quarter, after the results turned, it has been an outperformer in the whole sector and I think that could continue. Like you said 14 times one year forward is maybe the cheapest it has been in the last five years. So, I think a target of close to Rs 900 in the next six to nine months is on the cards.
Sonia: What would your pecking order look like now -- for somebody say who wants to still invest in the IT space for the next 6-12 months, what would your order look like?
Bhasin: The price comfort of Wipro at Rs 475 gave us to put a buy there. We will review our estimate after today’s earnings but Wipro, HCL Tech, TCS and Infosys, in that order we would recommend a buy. We think at 17 times TCS, you could get a discounting of maybe 1 percent more on the downside but these are accumulation levels, you won’t even know if November passes off well, there could be an upgradation on the visa cost which can shore up the bottomline. So, for us, all these four are buys with a one year upside of 20 percent minimum.
Latha: By now you must have had a good idea of the numbers. It seems to be a beat on the EBIT, a beat on the revenues, profit also a beat actually compared to estimates, though it is a little slightly lower than last year’s performance. First thoughts?
Taurani: The numbers are good on the revenue front, excellent execution basically. Even the guidance has not been revised downwards. That is a positive surprise because given the likes of your Infosys, Tata Consultancy Services (TCS) expecting growth of about 7-8 percent, HCL Tech organically grew at about 9-11 percent kind of a number. So, that look extremely good for HCL Tech.
Sonia: So, in terms of stock performance, do you get a sense that HCL Tech could outperform peers, both Infosys and TCS at least in the next 6-12 months considering it has done a lot of it already?
Taurani: Yes, if you see the guidance, that included a three percent kind of inorganic growth via the Volvo and the IP led acquisition which they had done. Apart from that, if the organic growth continues to be in the range of this 9-11 percent, they will obviously outperform peers in terms of stock price performance.
Latha: There is a change of guard. Anant Gupta is stepping down and C Vijayakumar is taking over as the CEO. Will that be seen as a positive?
Taurani: Not as a positive. Even when Anant was there, the company was actually doing well in terms of growth. So, I do not think as of now, the impact in terms of numbers how it will be, but prima facie does not look like, it is a neutral thing basically. It will not have a positive impact as such on the stock as of now.
Sonia: Would you scale up your FY17 earnings per share (EPS) estimates and for FY18 as well? Consensus is at about Rs 60 for FY18 and slightly lower for FY17, but would you scale them up after these earnings?
Taurani: Our estimates are largely already placed in terms of growth. So, we have already resumed a double digit growth for HCL Tech in basically a 11-12 percent kind of number. On the margin also, we are currently at about that guidance range of 19.5-20.5 percent EBIT levels. So, will not see much of revision as such. It will be more of a rerating kind of a thing, where we will rerate our target price of Rs 1,000. So, not much in terms of earnings upgrades, because we have already factored in the best for HCL Tech.
Latha: So, what is your price target you said?
Taurani: Our price target right is Rs 1,000. But, the only good part to look here is it is more of a relief point of view because if you see, Infosys, TCS, when the numbers came out, we revised their earnings downwards by about 5-7 odd percent. HCL Tech will not have anything of that sort. So, that is one good thing.
Latha: Is there a possibility that now, because HCL has stood out with its guidance and with its performance, neither of them sagging from previous quarters nor disappointing in terms of guidance, do you think that there could be a little bit of a migration from these biggies to HCL Tech?
Taurani: Yes, probably there could be. We are right now standing at about Q2 and if Q3 also does something well and they do not revise their guidance downwards, that will add more support and it will basically just valuate the view that they can do that growth of 9-11 percent organic basis which is a good number.
Latha: How would you expect the stock to react today itself? As Reema has been pointing out, the stock has already put on a lot of weight. Your Rs 1,000 is not something that you expect the stock to achieve very soon. How might it react today?
Taurani: It may react a mild positively as of now from the current levels reason being what will happen is there will be a conversion in terms of the valuation gap of Infosys, TCS versus HCL Tech. So, if you see in terms of price-earnings ratio (P/E) multiple, HCL Tech used to be given a discount of 15-20 percent on the valuations front versus Infosys or TCS. But now, that will convert to about 10-12 odd percent given the better growth prospects which HCL Tech has right now. So, that may happen and again that is largely factored in our target price as well. We have already assumed a 12 percent discount versus Infosys for HCL Tech.
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