Buy HCL Technologies; target of Rs 1090: ICICI Direct

ICICI Direct's research report on HCL Technologies

HCL Tech reported good set of Q2FY19 numbers. The company reported healthy revenue growth mainly led by better performance in North America (geographically). Among verticals, retail & CPG (13% QoQ) and lifesciences & healthcare (3.2% QoQ) led the growth. The company has maintained its revenue guidance of 9.5-11.5% in constant currency and margin guidance of 19.5-20.5%for FY19E. US$ revenues grew 2.1% QoQ to $2,099 million (above our estimate of 1.3% growth). At 20.0%, EBIT margins increased 30 bps QoQ (vs our 19.5% estimate). Factors that played out in margin expansion were rupee depreciation (+90 bps), productivity in terms of increase in utilization and automation (+80 bps) offset by partial wage hike (-70 bps), SG&A (-50 bps) and seasonality (-30 bps).

Outlook

HCL Tech reported good set of numbers. We believe, healthy outlook for IMS (36% of revenues), deal signings and growth momentum in mode 2 and 3 are expected to bode well for the growth. In addition, HCL has lower onsite risk as 65% of its workforce in US is locals. Moreover, it is trading at an attractive valuation (12x FY20E EPS) and discount to its peers. Hence, revise our recommendation on the stock to BUY with a revised target price of Rs 1090 (~14x FY20E EPS).