KR Choksey's research report on HCL Technologies
HCL Tech Q3FY25 profits exceeded our expectations by 2.8%. In Q2FY25, HCL Tech had initially guided a revenue growth of 3.5% - 5.0% YoY CC on organic basis. This has now been revised to 4.5% - 5.0% YoY CC on a consolidated basis, factoring in a 50bps contribution from the HPE CTG acquisition (inorganic growth). Consequently, the organic growth forecast has been lowered to 4.0% - 4.5% YoY CC (earlier: 3.5% - 5.0% YoY CC), reflecting slowdown in core operations. However, we retain our FY26E/FY27E EPS estimates remain at INR 72.6/78.9, as slowdown in the organic business is likely to be mitigated by inorganic growth further supported by recovery in discretionary spending. We assign a P/E of 24.0x and roll over our valuation to FY27E to arrive at a target price of INR 1,894 (previously: INR 1,887). HCL Tech has delivered strong historical growth, with revenue and PAT CAGRs of 13.4% and 12.1% over FY21-FY24, respectively. However, the narrative takes a tempered turn as growth projections for FY24-FY27E remain subdued, signaling a moderation in momentum. Moreover, the stock is currently trading at an unprecedented 1-Year Forward P/E of 30.8x—well above its three-year average of 19.5x. This divergence between price and fundamentals raises concerns about the risk-reward equation. In light of these dynamics, we maintain our "HOLD" rating, reflecting a cautious stance on the stock's limited upside potential.
Outlook
However, we maintain our FY26E/FY27E EPS estimates of INR 72.6/78.9 as slowdown in the organic business will be compensated by the inorganic business, supported by anticipated benefits from discretionary spending recovery and deal cycle improvements. We assign a P/E of 24.0x and roll over our valuation to FY27E to arrive at a target price of INR 1,894 (previously: INR 1,887).
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