Buy HCL Technologies; target of Rs 1020: Prabhudas Lilladher

Prabhudas Lilladher is bullish on HCL Technologies has recommended buy rating on the stock with a target price of Rs 1020 in its research report dated January 20, 2018.

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January 24, 2018 / 18:26 IST

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Prabhudas Lilladher's research report on HCL Technologies

HCL Tech 3QFY18 results delivered a beat on USD revenues albeit were inline on EBIT margin and PAT. Constant currency revenue growth for the quarter stood at 3.3% and above our estimates (Ple: 2.5%). Engineering Services up 13.6% QoQ and 47% YoY drove growth for the quarter. EBIDTA margins at 23.1% for 3QFY18 was up 90bps QoQ and above our estimates (Our ests :22.2%). However, Increase in amortization has hit EBIT margin which came at 19.6% down 10bps QoQ and inline with estimates (our ests : 19.6% ). PAT was inline estimates. HCL Tech has further added to its IP assets in 3QFY18 with additional partnerships. Company has spent USD310mn during the quarter for further IP asset acquisitions. Hence, total Intangible asset on account of Licensed IPR as on 3QFY18 stood USD1.14bn. 3QFY18 revenue beat was accompanied by higher amortization. As IBM IP product revenues tend have strong seasonality in 3Q, this has aided in 3Q revenue beat. HCL Tech amortization for IP products is linked to IP revenues. Hence, company has seen spurt in amortization in 3Q which restricted EBIT margin and PAT for the quarter. HCL Tech retained constant currency revenue growth at 10.5-12.5% for FY18 (USD revenue growth upped to 12.1-14.1% YoY). Management guided deal signing remain at 12 quarter high and anticipates strong revenue growth from 1HFY19E. We estimate HCL Tech USD revenue growth assumptions to 12.1/11% for FY18/FY19E (vs 12/10.5% modelled earlier). Organic USD revenue growth for FY18 would be 7%(Constant currency organic growth for FY18 would be 5% which is marginally below peers Infosys/TCS). Our EPS estimates are retained at Rs63/68/75/sh for FY19/FY20E. Stock trades at 14x FY19E EPS and 12.7x FY20E EPS which is reasonable. Softer organic revenue growth for FY18E and high quantum of investment in acquisition of IP assets is constraining P/E multiple expansion.

Outlook
Retain BUY with TP increased by 5% to Rs1020/sh(13.5x FY20E EPS) led by rollover to FY20E EPS.

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