Buy HCL Technologies; target of Rs 1255: Prabhudas Lilladher

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Prabhudas Lilladher's research report on HCL Technologies

HCL Tech 2QFY19 results were steady with beat on USD revenues and PAT. Revenues came at USD2099mn were up 2.1% QoQ and above our estimates (USD2090mn). Constant currency growth for the quarter stood at 3% QoQ (Ple: 3.2%). Organic constant currency revenue growth for the quarter would be ~1.8% and rest owing to Actian acquisition consolidation and revenues from new IP deal signed in 1QFY19. Infosys/TCS delivered 4.2/3.7% constant currency organic revenue growth for 2QFY19 respectively. Hence, HCL Tech’s organic growth continued to lag select Tier 1 peers (Infosys/TCS). BFSI vertical revenues were up 0.1% in constant currency and remained weak. This is the second consecutive quarter of weakness in the BFSI vertical and management cited that softness in two European accounts lead to this tepid performance. While TCS/Infosys are showing strong acceleration in BFSI, HCL Tech continues to show tepid performance in BFSI owing to client specific issues. Retail and CPG (up 13% QoQ in constant currency), Public Services (up 5.3% QoQ in constant currency) drove growth on vertical front. IMS (up 2.5% QoQ in constant currency), Engineering and R&D Services (up 6.3% QoQ in constant currency) remained steady on service line front.

Outlook

We retain our EPS estimates at Rs74/82/sh for FY19/FY20E. Stock trades at 11.7x FY20E EPS (TCS/ Infosys trading at 19.1/15.6x FY20E EPS. Retain BUY with TP retained at Rs1255/sh (14.5x Sep20E EPS).

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