Buy HCL Technologies; target of Rs 1391: KR Choksey

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KR Choksey's research report on HCL Technologies

HCL Technologies Limited (HCLT) Q4FY22 performance was lower than with our estimate and posted a soft quarter, dollar revenue witnessed a meagre growth by 0.5% QoQ, impacted by a steep decline in the P&P business. Revenue guidance of 12-14% CC (vs. 12.7% CC in FY22) implies a 2.4-3.2% CQGR, supported by USD 8.2bn net-new TCV signings and P&P base impact, but without any contribution from mega deals. Services business grew by 5%, crossing a milestone of USD 10bn in FY22 (CQGR of ~5.2% for 3 consecutive quarters). Products and Platforms (P&P) business optically declined seasonally at a higher-than-expected rate of 24% QoQ. Underlying metrics are extremely healthy with record headcount addition, steady progression of clients across higher size buckets and lower-than-peer attrition. Proactive investments in digital competencies, especially on data, cloud and experience did impact margins but have improved the durability of growth. Our target price of INR 1,391 is based on 21.5x Mar-24E EPS with EPS CAGR of 15.3% over FY22-24E.

Outlook

HCLT is currently trading at a valuation with a P/E multiple of 19.7x/17.1x on FY23E/FY24E earnings. HCLT has reported strong growth on the back of accelerated investments in geo expansion/pricing lever in mode-2, rise in FY22 deal (ACV) and strong commentary on pipeline, P&P recovery in the medium term, with an increase in subscription/support composition as well as growing cross-sell services. Hence we are maintaining our target price of INR 1,391 per share with a P/E multiple of 21.5x to the FY24 estimated EPS of INR 64.6, an upside of 26.2% over the CMP. Accordingly, we upgrade our rating to “BUY” rating to the stock.

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