Buy HCL Technologies; target of Rs 1410: Motilal Oswal

Motilal Oswal's research report on HCL Technologies

HCL Technologies (HCLT) reported a weak 2QFY24 as revenue grew 1.0% QoQ in constant currency (CC) to USD3.2b (below our estimate of 2.9% QoQ CC). HCLT reported consolidated organic growth of 0.5% QoQ CC, with the one-month integration of ASAP contributing 0.5% to overall growth. A slowdown in demand was more pronounced than anticipated in 2Q due to lower discretionary spending and the reprioritization of spending to core operations. ER&D reported 5.0% QoQ CC growth, while organic growth was 1.6% QoQ CC. Despite the softness in 2Q, HCLT reported its highest-ever NN deal TCV of USD3.97b (including Verizon deal) vs. 1.56b in Q1. The deal pipeline remains healthy and HCLT is chasing multiple opportunities in the emerging technologies. EBIT margin improved by 150bp QoQ to 18.5%, beating our estimate by 80bp, aided by robust cost-control measures undertaken in 1H and rationalizing employee pyramid. The company saw a second consecutive quarter of net headcount reduction by more than 2k, which, along with the optimization of subcon expenses, contributed significantly to margin improvement. With a strong margin outperformance, HCLT remains confident of achieving its margin guidance of 18-19%.

Outlook

We have lowered our FY24/25 EPS estimates by 1.6/3.0% to account for the 1Q miss. Reiterate BUY with a TP of INR1,410 (based on 21x FY25E EPS).