Buy HCL Technologies; target of Rs 1250: HDFC Securities

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HDFC Securities' research report on HCL Technologies

Rev came higher than est. at USD 2,364mn, a strong 4.2% QoQ CC which included 3.7% organic (supported by early ramp-up of large deal) and 0.5% from Strong-Bridge Envision consolidation. Acquired IBM products and other inorganic (Actian, H&D, Strong Bridge) expected to contribute ~6.5% to FY20 rev growth. HCLT maintained its FY20 rev guidance at 14-16% CC, implying ~8-10% organic growth. Mode-2 biz (18.8% of rev) decelerated to 3.6% QoQ, however Mode-1 delivered strong growth of 4.1% QoQ. Service segments reclassified into IT & Business services (75.3% of rev and 3.6% QoQ), ER&D (16.9% of rev and 5.6% QoQ) and Products & Platform (7.8% of rev and 7% QoQ). HCLT has lower risk (vs. peers) from adverse H-1B regulations with US localisation at 70%. Margin performance was lower with EBIT% at 17.1%, -193bps QoQ (17.5% est) impacted by lower gross margin (-130bps impact) and higher SG&A (-50bps impact). Margin was impacted by onsite heavy ER&D, investments to build front-end/HCL Software division and INR/Visa cost impact. Mode-1 margins moderated while Mode-2/3 margins were flat QoQ. APAT at Rs 22.20bn was impacted by higher ETR.

Outlook

We maintain BUY on HCL Tech (HCLT) following a strong revenue and tad lower margin performance. Organic growth momentum is strong and integration of IBM products (key monitorable) will keep growth at top-end of guidance and margin at the lower end. Our TP is Rs 1,250 at 14x Jun-21E EPS.

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