Buy HCL Technologies; target of Rs 1140: Sharekhan

Sharekhan's research report on HCL Technologies

Q2FY23 numbers were robust with a beat in revenue/EBIT margin with CC revenue growth of 3.8% (versus expectation of 3%) and EBIT margin improvement of 93 bps q-o-q to 18% despite wage hike impact and variable pay. TCVs also picked up, rising 16% q-o-q to $2.3 bn while LTM attrition was flat q-o-q at 23.8% in IT services. Revenue growth was broad-based across vertical and geographies and was driven by 5.3%/5% q-o-q increase in CC revenue growth from ITBS/ERS); however, PP revenue declined by 7.8% due to seasonality. EBIT margin improvement reflects better realisations, higher utilisation, pyramiding optimization and INR depreciation. Raised CC revenue guidance to 13.5%-14.5% (versus 12-14% earlier) while revision in EBIT margin to 18-19% (18-20% earlier) is broadly on expected lines. Management targets deal wins of $2-2.5 bn every quarter and expects US market to lead the growth momentum while Europe would see little lower growth given macro environment.

Outlook

We maintain a Buy on HCL Technologies with an unchanged PT of Rs. 1,140, given strong growth in application services, good dividend payout, healthy order intake and reasonable valuations.