Accumulate HCL Technologies; target of Rs 1169: Prabhudas Lilladher

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Prabhudas Lilladher's research report on HCL Technologies

We downgrade HCLT to ‘Accumulate’ (earlier Buy) as we cut DCF based target price to Rs. 1169 (earlier Rs. 1295) led by 1) decline in margin profile, 2) volatility in P&P revenue dragging down overall revenue growth, 3) increase in risk free rate and 4) moderation in terminal growth rate. We cut EPS estimates by 4%/5% for FY23/24, led by cut in EBIT margin estimates by ~50-70 bps. Q4 reported weak revenue (0.5% QoQ USD) due to decline in P&P business (-24.4% QoQ USD) and moderation in ER&D growth (3.5% QoQ USD). IT services revenue grew 4.6% QoQ USD. We believe growth in new deal TCV (14% YoY) and ACV (21% YoY) for FY23 is strong, but revenue guidance of 12-14% YoY for FY23 is lower due to volatility and declining trajectory of P&P (12% of total revenue). We anticipate recovery in P&P business to be slow because – 1) it is run as a software start-up and 2) 25% of P&P portfolio is declining in high double digit. Growth in ER&D business (16% of revenue) is also lower than ER&D peers for FY22.

Outlook

We assign DCF based TP of Rs 1169 with implied target multiple of 19x (earlier 21x) on FY24 EPS. HCLT is currently trading at 20x/18x on FY23/24E EPS of INR 54.5/62.5 respectively with Revenue/EPS CAGR of 12.4%/12% over FY22-24E.

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