Dolat Capital recommended accumulate rating on HCL Technologies with a target price of Rs 700 in its research report dated July 17, 2020.
Dolat Capital's research report on HCL Technologies
HCLT reported 7.4% QoQ degrowth in CC terms (DE: 6%) led by -1.6% QoQ degrowth in Mode 2 but steep -9.5%/-4.7% QoQ decline in Mode 1/Mode 3 segments (project offshoring impact). OPM declined by 40bps to 20.5% (DE 19.8%) helped by tighter cost controls and Fx. HCLT reintroduced guidance of avg. quarterly growth of 1.5% to 2.5% QoQ on CC basis over Q1-Q4. Growth confidence is led by healthy order signings in June (30% of deal signed in last 15 days of the quarter) and robust jump in pipeline by 40% YoY providing visibility and comfort to the mgmt. Net New deals as well as Renewals were higher on YoY basis. OPM guidance implies gains in profitability for FY21 on YoY basis. HCLT expects growth to come in H2 as ramp up of deals (11 transformational deals won in Q1) and its relative strength in cost transformation deals and vendor consolidation deals. Improvement in supply-side situation in ER&DS to drive growth while sustained traction in P&P offerings to drive OPM gains. With strong lead indicators and expectations of performance revival starting Q2, we largely retain our estimates building in CC $revenue and EPS CAGR of ~4%/7% over FY20-22E.
Outlook
We retain our Accumulate rating on the stock with TP of Rs700 valued at 15x PER on FY22E EPS (3yr Median +2SD – higher PE is justified given expected robust improvement in FCF profile on TMF basis).
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