While we are not excited with every inorganic move of the company, the strategic intent, earnings visibility and undemanding valuation makes it a worthy buy in volatile markets
We are recommending HCL Technologies as a tactical pick. The company reported strong execution in Q3 FY19.
In the quarter gone by, it posted healthy constant currency quarter-on-quarter (QoQ) and year-on-year (YoY) revenue growth of 5.6 percent and 13 percent, respectively.
HCL’s key focus areas namely Mode 2 (largely digital) has performed well, with sequential growth of 13 percent. The combined share of Mode 2 and Mode 3 (largely products) services is now 29.1 percent and has grown by 9 percent sequentially.
The company called out record deal wins in the quarter under review. This is for the third time in the last five quarters that the company has reported record wins. The total deal wins in the first nine months of FY19 is 40 percent higher than the year-ago period. This provides a strong revenue visibility for the coming fiscal.
The company has seen strong net addition to employees in the first three quarters of the current fiscal, which also shows the confidence of the management on achieving accelerated growth going forward.
Attrition remains high at 17.8 percent and remains to be monitored. Utilisation too is on the higher side at 86.6 percent. Both factors could limit margin upside. Overall FY20 looks like a good year, despite several macro challenges
The improved order inflow and pipeline sets the stage for a strong FY20. While we are not excited with every inorganic move of the company (acquired select software products from IBM), the strategic intent, earnings visibility and undemanding valuation (12.6 times FY20 estimated earnings) makes it a worthy buy in volatile markets.Disclaimer: Moneycontrol Research analysts do not hold positions in the companies discussed here