Buy HCL Tech; target of Rs 1125: Emkay Global Financial

Emkay Global Financial's research report on HCL Tech

HCLT posted operating performance beat in Q3 due to better-than-expected strength in the software business. Revenue grew by 5% CC QoQ because of strong performance in the software business (30.5% CC QoQ), while the services business (2.2% CC) delivered broadly in-line performance. Growth in the services business was steady despite higher-than-usual furloughs in financial services (-1.7% CC QoQ), ramp-down by clients under stress in retail (-0.6%), and impact from furloughs and spending optimization by clients in technology and services (0.1%). Deal intake remained healthy at USD2.35bn in Q3, led by IT operating model transformation, cloud adoption, and large vendor consolidation deals. Management expects revenue growth in Q4 to be weak QoQ due to seasonality in the software business. However, management remains confident about the medium-term growth outlook due to market share gain, strong deal intake, and deal pipeline. HCLT has narrowed its overall revenue growth guidance to 13.5-14.0% CC (earlier 13.5-14.5%) and EBITM guidance to 18.0-18.5% for FY23 (earlier 18-19%). HCLT has also narrowed down its services revenue growth guidance to 16.0- 16.5% CC for FY23 (earlier 16-17%), implying 1.0-2.5% QoQ growth in Q4.

Outlook

We raise our earnings estimates by 1.4-1.8% for FY23E-25E, factoring in Q3 performance. We maintain BUY with a TP of Rs1,125/share at 17x Dec-24E EPS (earlier Rs1,100).