Buy HCL Technologies; target of Rs 665: HDFC Securities

HDFC Securities research report on HCL Technologies

HCLT posted revenue of USD 2,543mn, +2.1/16.4% QoQ/YoY CC (Product & Platform segment-led) and raised its full year guidance to 16.5-17.0% YoY CC for FY20E (15-17% earlier) implying 0.3 to 2.0% QoQ for 4Q. The full-year guidance includes industry-leading organic growth at 10.5 to 11% (10-11% earlier) and inorganic at 6% for FY20E. Despite the absence of mega deals, organic growth is expected to remain in high-single digit in FY21 (lower vs. FY20) supported by (1) Highest-ever deal pipeline, (2) Uptick in 4Q deal wins vs. 3Q and (3) 39 transformational deal signings in 9MFY20 (12 wins in 3Q majorly in Hi-tech, Mfg, BFSI). Traction in P&P segment is expected to continue supported by onboarding of ~90% customers of acquired IBM products over next 2-3 qtrs (4,600 onboarded in past 2 quarters). Product & platform business growth momentum supported by increasing partner/re-seller base (1,700 onboarded), cross-sell between products (Appscan-BigFix) and new license signings. EBIT margin came at 20.2%, +29bps QoQ supported by business-mix (stronger growth in high-margin P&P business). HCLT’s EBIT% guidance for FY20E now stands at 19-19.5% (18.5-19.5% earlier). While margin challenge of lower Mode-2 margins and onsite costs remain, traction in P&P segment and rationalisation of tail accounts (largely in Mode-1) are likely to keep margins steady (factored 19.2/19.3/19.3% for FY20/21/22E).

Outlook

We maintain BUY on HCL Tech (HCLT) following a better than expected rev/margin performance (P&P led) and ~2% increase in EPS. Traction in P&P business is encouraging and strong pipeline to support organic growth. Our TP of Rs 665, implies 14x Dec-21E EPS.