Axis Securities has given 'buy' recommendation on
HCL Technologies with a target Price of Rs 1,235, a potential upside of 12 per cent.
Investment Rationale
IBM partnership – driving growth and earnings momentum: HCL Tech has completed the acquisition of 7 products from IBM out of which 5 products were earlier under IP partnership and 2 products are new. Company has already paid $ 81 crore on June 30, 2019, and will likely pay $ 81.25 crore after one year. The deal also has an earnout component of $ 15 crore to be paid in three installments. This partnership will lead to the goodwill of $ 92 crore and intangible asset of $ 125 crore adding to amortization. IBM product portfolio has an EBITDA margin of 50 per cent+ with amortization of around 20 per cent, yielding EBIT margin of around 30 per cent.
Quarterly performance: HCL Tech reported strong Q1FY20 numbers. The numbers are much in line with expectations. The revenue in constant currency grew by 2.7 per cent. QoQ and 18.4 per cent on a YoY basis at Rs. 16,425 crs. However net income was down by 13.6 per cent QoQ at Rs. 2,220 crore. The mode 1 business vertical grew by 4.1 per cent QoQ, Mode 2 business vertical grew by 3.6 per cent QoQ. Mode 3 business grew by 6.5 per cent QoQ.
Strong guidance for FY20: The company has given strong revenue growth guidance 14 per cent-16 per cent for FY20 backed by strong deal wins. It maintained FY20 operating margin guidance of 18.5-19.5 per cent citing investments in the digital business. The management commentary on deal wins was positive with 12 transformational deals linked during the quarter. During the quarter the company added 2 clients in 100mn+ vertical, 6 clients in 10mn+ vertical, 10 clients under 5mn + bucket, 10 clients under 1mn + bucket.