IT and telecom are among the sectors that have attracted investors' attention in the times of COVID-19 as both sectors offer bright prospects of growth while the world's dependence on technology increases.
In the IT space, one particular stock has been buzzing of late. It hit a fresh 52-week high on a couple of occasions in the last few trading sessions.
Shares of this IT player, HCL Technologies, have jumped 41 percent in this calendar year on NSE, as of September 21 close, while the benchmark Nifty is 7.5 percent down.
Brokerages say there is still some steam left in the stock.
CLSA has maintained a buy call on the stock with a target price of Rs 870 as the company's mid-quarter update has raised Q2 revenue and margin guidance. The company has highlighted strong order booking and a healthy pipeline.
CLSA has raised its FY21/22 EPS estimates by 2 percent and said that HCL Tech along with Infosys is its top pick in the IT sector.
HCL Technologies on September 21 announced its intent to acquire DWS Limited, an Australian IT, business and management consulting group.
DWS, with over 700 employees and offices in Melbourne, Sydney, Adelaide, Brisbane, and Canberra, delivers business and technology innovation to large clients across a spectrum of verticals, the company said in an exchange filing.
HCL Technologies is planning to double headcount in smaller towns, including fresh hires and relocation of existing employees over a two-three year period, CEO C Vijayakumar said. The smaller towns in focus include Lucknow, Madurai, Nagpur and Vijayawada and the company already has close to 10,000 employees working in these places, The Economic Times reported.
Jyoti Roy, DVP- Equity Strategist, Angel Broking is positive on the stock's growth prospects. "We continue to maintain our positive outlook on HCL Tech as the announcement reflects the company's leadership position in the cloud migration space. We believe that HCL will be the biggest beneficiary of migration from public cloud to hybrid cloud driven by a strong presence in the infrastructure management business," Roy said.
Brokerage firm BOBCAPS (a wholly-owned subsidiary of Bank of Baroda) has a buy call on HCL Tech with a target price of Rs 920.
BOBCAPS believes HCL Tech's digital capabilities, commitment towards expanding Mode-2 and 3 portfolios, and operational efficiencies have helped the company gain market share as it benefits from vendor consolidation.
HCL Tech’s earlier revenue growth guidance of 1.5-2.5 percent on average for the remaining quarters of FY21 (constant currency) implied a revenue decline in the range of 0.8-2.3 percent year-on-year (YoY) for the year.
"The revised Q2 growth outlook of at least 3.5 percent quarter-on-quarter (QoQ) CC growth coupled with its earlier indicated outlook for the second half of FY21 (1.5-2.5 percent) now implies that FY21 will likely see flat-to-low single-digit revenue growth against a decline earlier," BOBCAPS said.
"This is a very positive signal, especially in the current economic climate, and indicates strong recovery. Revised Q2 expectations coupled with strong deal momentum also prepares the ground for an FY21 guidance upgrade and the possibility of double-digit YoY growth in FY22 (we bake in 9.5 percent YoY dollar revenue growth)," the brokerage added.
BOBCAPS has increased FY21/FY22/FY23 EPS estimates by 4.5 percent/2.8 percent/2.8 percent and revise its September 2021 target price up to Rs 920 from Rs 810, set at a target P/E multiple of 17 times against 15.6 times before.
Brokerage firm Motilal Oswal Financial Services, too, has a buy call on the stock with a target price of Rs 930.
As per the brokerage, the stock is currently trading at nearly 16 times FY22 EPS and the target price of Rs 930 implies 18 times FY22 EPS.
The brokerage pointed out that HCL Tech’s exposure to deeply troubled verticals, such as energy, travel, transportation, hospitality and retail, is lower against peers.
Higher exposure to IMS (nearly 37 percent of revenue), which comprises larger share of its non-discretionary spends, offers better resilience to its portfolio in the current context, Motilal Oswal said, but added that the company’s high exposure to ER&D (about 16 percent of revenue) is a key monitorable.
"We expect HCL Tech to better navigate the current crisis and emerge stronger due to an expected increase in enterprise demand for digital services. Our confidence partly stems from the company’s historical track record of adapting to multiple business challenges and technology change cycles," said Motilal Oswal.
Brokerage firm ICICI Direct has maintained a buy call on the stock with a target price of Rs 885.
ICICI Direct believes the acquisition of DWS will boost the company’s revenue and geographic presence and the acquisition also has scope for margin expansion led by higher offshoring.
In addition, the company’s recent upward revision in Q2FY21E revenues and margins, coupled with improving organic growth has made the brokerage remain positive on the stock from a long-term perspective.
"Considering opportunities in cloud consumption, cyber Security, automation, app modernisation, we remain optimistic on HCL Tech’s revenue trajectory," ICICI Direct said.
The brokerage expects various cost rationalisation measures of the company to drive margin improvement in the coming quarters.
"This has prompted us to revise our EPS estimates and target price upwards. However, the recent run-up in price factors in most of the positives and hence, maintain a buy rating on the stock with a revised target price of Rs 885 (17 times FY22E EPS)," ICICI Direct said.
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