Prabhudas Lilladher is bullish on HCL Technologies has recommended buy rating on the stock with a target price of Rs 751 in its research report dated July 20, 2020.
Prabhudas Lilladher's research report on HCL Technologies
HCLT reported revenue decline of 7.2% QoQ CC (Ple7.1%, Cons:7.1%) & 7.4% QoQ in $ terms in line with our & street estimates. Revenue decline was sharp in IT Services (-7.8% QoQ) and ERD (-9% QoQ) and very moderate in Products and Platforms (-2.1% QoQ). EBIT margin performance was impressive & was contained just to -40bps QoQ to 20.5% (Ple:19%, Cons: 19.5%). HCLT expects cc growth of 1.5%-2.5% for the next 3 quarters which translated revenue decline of 0.8%-3.3% $ terms in FY21E. This compares with 0.9-2.2% CQGR implied by Infosys’s revenue outlook and 2.4% by TCS’s intent to achieve flat YoY cc growth by Q4FY21. Margins to be in 19.5% - 20.5% range. HCLT is looking to defend/expand margins in FY21-an impressive thing, in our view. Management believes worst is over and is confident of good growth trajectory- confidence is based on large deals, 40% higher pipeline compared to pre-Covid and stability across verticals such as financial services, healthcare, telecom and CPG. We expect revenue decline of 2.5% $ terms in FY21E. Due to strong margin performance, strong execution & strong recovery in FY22 on pent-up demand led to ~10% for FY22/23.
Outlook
We now value HCLT on 15X (33% discount to Infy) & arrive at changed TP of Rs.751 (earlier: Rs.591) on Sep-22 EPS of Rs. 50.1. Stock Is trading at a very attractive valuation of 14.5X/13.0X on FY22E/23E EPS of Rs. 48.1/52.1 respectively. Upgrade to Buy from Hold.
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