Buy HCL Technologies; target of Rs 1000: HDFC Securities

HDFC Securities' research report on HCL Technologies

HCL Tech (HCLT) posted in-line revenue and operating performance in 2QFY18. Revenue  stood  at  USD  1,928mn,  2.3%  QoQ  (0.9%  CC  and  +140bps cross currency).  Growth  was  impacted  by a decline in India business (USD 20mn impact),  with  an additional  decline  USD  50mn expected in 2H, owing to completion  of  SI projects. HCLT also extended its IP partnership with IBM and  new IP partnerships (DXC, Alpha Insights) to grow its Mode-3 business.  EBIT%  of  19.7%,  -41bps  was  impacted by wage hike (-40bps impact), with onsite/offshore  hikes  of 1.5/5% respectively. HCLT maintained its revenue guidance  of  10.5  to  12.5% (12.1 to 14.1% in USD terms), implying a wide range  of  2.6  to 4.9% CQGR over 3Q/4QFY18.Management indicated to revenue growth  at  the  lower  band of guidance. Management also maintained margin guidance at 19.5 to 20.5%.

Outlook
We  maintain  our positive outlook on HCLT, based on (1) Increasing digital deal  size  and  deal  wins (28 deals in 1H as compared to 42 in FY17), (2) ‘DryIce’  automation  supporting Mode-1 services, (3) Recovery in IMS going ahead,  and  (4)  Scale  dominance  and  IP  strategy  driving ER&D. Expect revenue/EPS  growth  at  11/9%  CAGR respectively over FY17-20E (highest in large-cap  IT),  factoring  in  USD  revenue  growth  of  12/10.3/9.9%  for FY18/19/20E   respectively   and  EBIT%  at  19.4/19.2/19.5%  respectively.  Maintain BUY with a TP of Rs 1,000, 14x FY19E.

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