Buy HCL Technologies; target of Rs 1265: Sharekhan

Sharekhan's research report on HCL Technologies

HCL Tech reported a CC revenue decline of 1.3% q-o-q, missing our estimates of 1.1% revenue growth. Revenue stood at $3,200 million, down 1.1 % q-o-q/up 5.8% y-o-y, led by the decline in ERS business, down 5.2% q-o-q in CC terms, and HCL Software, down 3.1% q-o-q in CC terms. EBIT margin contracted 120 bps q-o-q to 17%, below our estimates of 18.1% in a seasonally soft quarter due to higher direct costs, increased SG&A expenses, and weak revenue. New deal wins TCVs declined 24% q-o-q to $1,565 million. Order pipeline was at all-time high, which grew by 17.7% q-o-q/26.2% y-o-y. The telecom, media and entertainment segment fell 14.4%, while the technology services segment declined 7.8% q-o-q in CC terms. Management expects a revival in the coming quarters after two consecutive quarters of softness due to seasonal weakness, given the all-time high order pipeline. Hence, it is optimistic about achieving guidance on revenue and EBIT for FY24.

Outlook

We believe the stock continues to trade at reasonable valuations. At the CMP, the stock trades at 19.7x/17.6x its FY24/25E EPS. Hence, we maintain Buy on HCL Tech with a revised PT of Rs. 1,265.