Buy HCL Technologies; target of Rs 980: HDFC Securities

HDFC Securities research report on HCL Technologies

HCL Tech (HCLT) posted revenue of USD 1,884mn in 1QFY18, 3.7% QoQ, based on 2.7% CC (~1.3% organic), with BFSI and Retail & CPG verticals at 5.3% and 4.9% respectively. Though IMS recovered to 1.7% (0.9% QoQ in 4Q), there are near-term headwinds. Operating performance was strong, with EBIT% at 20.1%, supported by a better mix (higher IP and lower BPM) and productivity gains (utilisation at 86%). HCLT maintained its guidance of 10.5-12.5% CC revenue growth for FY18E, implying CQGR of 2 to 3.2%.

Outlook

IMS  and  ER&D  have  fewer large deals in pipeline, as well as in-sourcing challenges,  which  may  restrict  growth  in  the  near  term. However, an increase in renewals will support growth. We maintain our positive outlook on  HCLT  based  on (1) Superior growth visibility, supported by Mode-2 and Mode-3 services, (2) Scale dominance in IMS (market expansion strategy) and engineering  services,  (3)  ‘DryIce’ automation supporting Mode-1 services and (4) Deeper penetration of digital (>60% of top-150 accounts in Mode-2). Expect  revenue/EPS  growth  at  12/10%  CAGR  respectively  over  FY17-19E (highest  in  large-cap  IT), factoring in USD revenue growth of 12.1/11.5% for  FY18/19E  and EBIT% at 19.9/20.3% respectively. Maintain BUY with a TP of Rs 980, 14x FY19E.