Buy HCL Technologies; target of Rs 2130: Prabhudas Lilladher

Prabhudas Lilladher's research report on HCL Technologies

HCLT reported overall strong results in Q2 with revenue, EBIT & PAT coming ahead of our & consensus estimates. Revenue came at US$3.44 bn, up 1.6% QoQ CC (PLe 1.1% QoQ CC & consensus est. 0.6% QoQ CC). IT Services, ER&D & Software business grew by 1.8%, 1.1% & 1.4% QoQ CC respectively. In IT Services, the growth was broad based across geographies & verticals (FS grew excluding the JV divesture) with a healthy mix of cost optimization, transformation & discretionary spends. EBIT margin in Q2 increased by 150 bps (PLe of 80 bps & consensus est. of 90 bps) to 18.6% due to lower marketing spends & strong software business. The deal TCV was also steady at US$ 2.2 bn vs US$ 1.96 bn in Q1 with healthy pipeline. After a Q1 trough, the recovery in Q2 was broad-based across verticals despite the revenue loss through JV divestment, which impacted FS vertical growth (flat QoQ).

Outlook

Given its defensive business mix and resilient vertical portfolio, HCLT is well positioned to capture the boarder market theme and participate in the critical aspects of enterprise operations. We are baking in USD revenue/Earnings CAGR of 9.3%/12.8% between FY24-27E. The stock is currently trading at 25x/22x FY26E/FY27E. We maintain “BUY” on HCL Tech assigning PE of 25x to FY27E with a target price of Rs. 2,130.