Buy HCL Technologies; target of Rs 1225: Edelweiss

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Edelweiss' research report on HCL Technologies

HCL Technologies’ (HCLT) Q4FY18 revenue and operating margin at USD2,038mn (up 2.5% in USD) and 19.6%, respectively, were slightly below Street’s estimate of 3.2% and 19.8%. The key disappointment was muted organic growth guidance of 4.25-6.25% (CC) for FY19 versus 6-9% expectation; margin guidance was maintained at 19.5-20.5%. Key highlights: 1) management expects IMS services growth to improve in FY19; 2) will invest further in IP deals to expand Mode 2 & 3 capabilities; 3) mode 2 & 3 services contributed 23.4% to total revenue (up ~42%); and 4) won 15 large transformational deals during the quarter.

Outlook

We believe, the revenue guidance is much weaker than anticipated due to expected leakage from legacy services, although stable margin will enable 10.7% PAT CAGR over FY18-20E. Maintain ‘BUY’ with TP of INR1,225 as reasonable valuation protects downside.

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