Buy HCL Technologies; target of Rs 1110: Motilal Oswal

The research firm ICICI Securities believes earnings of apparel brands and retail companies under their coverage may surprise positively from Q3FY22E as the likely demand recovery may result in better than expected margin performance. Some of the costs savings achieved during pandemic may sustain and coupled with high operating leverage may lead to higher than pre-covid margins from Q3FY22E.  Stocks like Trent, V-Mart and Aditya Birla Fashion and Retail are the preferred picks backed by their strong and consistent track record of execution.

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Motilal Oswal's research report on HCL Technologies

HCLT delivered a revenue growth of 2.7% QoQ CC in 1QFY23 (60bp below our estimate) due to weaker growth in IT Services (+2% QoQ CC), partly compensated by better delivery in ER&D services (+3.7% QoQ CC) and a favorable seasonality in P&P (+5.1 QoQ CC). It reported stable new deal TCV of USD2.05b (down 6% QoQ, but up 23% YoY). The company maintained its FY23 USD CC revenue growth guidance of 12-14%. EBIT margin at 17% (-90bp QoQ) was 90bp below our estimate, with IT Services/ER&D down 170bp/50bp, partly offset by strong P&P margin, up 340bp QoQ. Though HCLT maintained its margin guidance of 18-20%, it now expects margin to be at the lower end of its guided band. While we were disappointed by the weak growth in the IT Services business, adverse seasonality (productivity pass-through), and high base (three straight quarters of strong delivery) indicate limited future read-through. Moreover, the continued strong deal TCV (Services book-to-bill ratio of 0.8x) and pipeline commentary should help them improve growth in 2QFY23. We expect HCLT’s Services business to do well in a favorable demand environment for Cloud migration and R&D outsourcing.

Outlook

HCLT generated a FCF of USD144m in 1QFY23, leading to a total cash and investments of USD1.5b at the end of the quarter. It also announced a dividend of INR10/share. We tweak down our FY23/FY24 estimate by 1%/3%. We maintain our Buy rating with a TP of INR1,110/share (19x FY24E EPS).

More Info

At 14:42 hrs HCL Technologies was quoting at Rs 915.80, down Rs 12.25, or 1.32 percent.

It has touched an intraday high of Rs 931.00 and an intraday low of Rs 905.20.

It was trading with volumes of 351,590 shares, compared to its thirty day average of 125,940 shares, an increase of 179.17 percent.

In the previous trading session, the share closed down 1.63 percent or Rs 15.35 at Rs 928.05.

The share touched its 52-week high Rs 1,377.00 and 52-week low Rs 925.00 on 24 September, 2021 and 12 July, 2022, respectively.

Currently, it is trading 33.49 percent below its 52-week high and 0.99 percent above its 52-week low.

Market capitalisation stands at Rs 248,517.45 crore.

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HCL Technologies - 130722 - moti