Hold HCL Technologies; target of Rs 1887: KR Choksey

KR Choksey's research report on HCL Technologies

HCL Technologies Q2FY25 earnings exceeded our expectations, despite revenue aligning our projections. Revenue stood at INR 288,620 Mn, up 6.2% YoY in CC (+1.6% QoQ CC). This was driven by the IT and Business service segment, which increased 6.2% YoY in CC, coupled with the HCL software segment, which increased 9.4% YoY in CC. We expect Revenue/PAT to grow at a CAGR of 8.7%/12.0% over FY24-FY26E, respectively, and at a CAGR of 8.6%/10.9% over FY24-FY27E. Accordingly, we increase our FY26E EPS to INR 72.6 (previously: INR 72.5) and P/E multiple to 26.0x (previously 23.0x), driven by improving discretionary spending, robust service revenue performance, and strengthening digital capabilities, resulting in a revised Target Price of INR 1,887. However, it is important to note that HCL Tech’s historical Revenue/PAT growth from FY21-FY24, is at 13.4%/12.1%, closely aligning with our forecasts for FY24-26E. Despite this, the stock is currently trading at an all-time high 1-Yr Forward P/E multiple of 29.4x, significantly above the three-year average of 18.1x.

Outlook

While our estimates align with historical growth rates, the recent rally in HCL Tech's share prices, driven by expectations of improved discretionary spending, has resulted in overstretched valuations, raising concerns regarding the sustainability of these levels. As a result, we downgrade our rating on HCL Tech from "ACCUMULATE" to "HOLD."