Buy HCL Technologies; target of Rs 1310: Motilal Oswal

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Motilal Oswal's research report on HCL Technologies

HCLT delivered a revenue growth of 1.1% QoQ CC in 4QFY22 (inline), with a strong growth in Services (+5% QoQ CC). However, the same was dragged down by its troubled Products and Platforms (P&P, -24% QoQ) vertical due to seasonality. It reported a good new deal TCV of USD2.26b (+6% QoQ). EBIT margin at 17.9% (-110bp QoQ) was in line, with a 180bp hit in the P&P business partially offset by an 80bp improvement in Services' margin. The management had initially guided at a FY23 revenue growth of 12-14%. It lowered its margin guidance to 18-20% (as against 19-21% guided in FY22). We are encouraged by its strong performance in Services (IT + ER&D) as this is the third straight quarter of strong revenue growth in this segment. With an organic growth of over 5% QoQ in IT Services, we believe HCLT will outgrow its largecap peers in 1QFY23. Within the Services business, IT Services has delivered 5% CQGR in the last three quarters. ER&D has delivered 5.9% CQGR over the same period - one of the best among its peers. We continue to expect Services to gain from the strong momentum in Cloud migration and R&D outsourcing. Strong hiring of ~11.1K (+5% QoQ) indicates better demand visibility.

Outlook

We lower our FY23 and FY24 EPS estimate by ~7% each due to the margin hit and lower growth guidance. We maintain our Buy rating with a TP of INR1,310/share (21x FY24E EPS).

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