Buy HCL Technologies; target of Rs 1430: Motilal Oswal
Motilal Oswal is bullish on HCL Technologies recommended buy rating on the stock with a target price of Rs 1430 in its research report dated November 17, 2021.
November 18, 2021 / 11:27 AM IST
Motilal Oswal's research report on HCL Technologies
We expect the robust performance in HCL's Services business, especially the ER&D vertical, to continue as the demand environment remains favorable. We also draw comfort from improving management commentary on continued growth momentum in the IT Services business. Sustainable demand momentum for Cloud and Digital Engineering benefits HCLT, given its large presence within IMS and ER&D and continued investments in capabilities. Strong headcount additions and deal wins reflects the management's confidence on a sustainable growth momentum. We continue to see potential in HCLT's Products and Platforms business. While, the recent departure of the head of Products has elevated concerns on business recovery. However, we don't see a meaningful risk of a further hit from this event, our sensitivity analysis (Exhibit 7) suggests limited impact on EPS even in a bear case (4% decline in revenue for the Products and Platforms business in FY23E would lead to a 2.6% drag on our EPS estimate). On a combined basis, HCLT should deliver USD revenue growth of 13.1% over FY21-23E. We expect EBIT margin to stabilize at 20% in FY23E, which should help it deliver 14.3% PAT CAGR over FY21-23E. HCLT's recent revision in payout policy (at least 75% of net income, up from 50%) over FY22-26 is a positive. A higher payout reflects a strategic shift to focus on organic growth and limit inorganic investments to bolt-on and capability based acquisitions (v/s large revenue accretive acquisitions). We maintain our Buy rating as we expect traction in the Services business in 2HFY22E and FY23E, driven by higher IMS/Cloud-focused deals.
Given its deep capabilities in IMS and strategic partnerships, investments in Cloud, and Digital capabilities, we expect HCLT to emerge stronger on the back of an expected increase in enterprise demand for these services. The stock is currently trading ~20.1x FY23E EPS, which offers a margin of safety. Our TP is based on 25x FY23E EPS. We maintain our Buy rating.
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