Hold HCL Technologies; target of Rs 1045: ICICI Direct

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ICICI Direct's research report on HCL Technologies

HCL Technologies (HCLT) has signed a definitive agreement to acquire select IBM software products for $1.8 billion. The HCLT management expects incremental revenue of $625 million in the first year and $650 million in the second year after deal closure. The EBITDA margin of the acquired products is expected to be ~50% with cash EPS accretive by 15%. The transaction is expected to be closed by mid-2019 subject to completion of applicable regulatory reviews. Our key concern in the transaction is around sustenance of margins at 50% (post acquisition), risk of revenues from IP products not fully materialising, lower focus on organic growth and near term pressure on cash flows. Hence, we downgrade the stock from BUY to HOLD.

Outlook

We believe HCLT’s continuous investments in IP and acquisitions could mount pressure on its profitability on account of the volatile nature of IP business and slow ramp of revenues through acquisitions. Hence, we lower our valuation multiple to 13x FY20E EPS (earlier ~14x) owing to a dim view on organic growth and scepticism around sustenance of revenues & margins in acquired assets along with near term pressure on cash flows. Hence, we have a HOLD recommendation on the stock with a revised target price of Rs 1045 per share.

For all recommendations report, click here

Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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