See 15% upside in HCL Tech from current levels: Quant

Basu Banerjee, Analyst, Quant Capital believes HCL Technologies is the only player left in the largecap space where there is considerable upside still left from the current levels. He will not be surprised to see atleast 15 percent upside on the stock when compared to other largecap players trading at huge valuations.

However, Bhavin Shah, Equirus Securities raises doubts regarding the cash flows of the company. According to him, the company continues to grow just from infrastructure services and has not clearly mentioned where the growth is coming from.
HCL Technologies's first quarter (July-September) consolidated net profit rose 18.7 percent- higher-than-expected- to Rs 1,416 crore from Rs 1,193 crore in previous quarter. Below is the verbatim transcript of the discussion on CNBC-TV18 Q: What is your first stake on HCL Technologies numbers, have margins been a big beat? Banerjee: Broadly, revenue has been bang in line with our estimate of USD 1270 million and as EBIT margin, we were expecting somewhere around 23 percent, it came in at 23.8 percent, so 80 bps beat. In terms of bottomline, we were expecting around Rs 1,330 crore, it came in around Rs 1,416 crore so primarily because of 80 bps bottomline better than expected, profit after tax (PAT) was around Rs 86 crore better than our estimates. Overall, good set of numbers in sync with the numbers by Tata Consultancy Services (TCS). Q: Do you think we could see a valuation catch up in HCL Technologies? Banerjee: Yes, if you see Infosys, TCS and Wipro, all three and even MindTree in the midcap space have run up considerably catching up with all the positives in the fundamentals and in terms of valuations at the higher end of the band. I think HCL Technologies is the only play left in the largecap space where there is a considerable upside left still from current levels and I will not be surprised to see this stock moving up at least by 15 percent from this level to justify a parity with the other largecap players trading at these kind of hefty valuations. Q: What are your first thoughts on HCL Tech numbers, do you think they will get better valuations now? Shah: I think the profit performance is definitely good. However, in terms of dollar growth, HCL Technologies is no longer leading the PAT, in fact year-on-year (Y-o-Y) growth is now slower than Infosys in this quarter particularly. They continue to grow just from infrastructure services. It is getting a little too lopsided in terms of where the growth is coming from and the other issue with HCL Technologies is that we have not understood the dividend policy because it changed last quarter for no apparent reason and we cannot figure out. So, while the market has rewarded this company with very good upside in terms of share price in last few months, we don’t understand the actual use of cash flow.