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Buy HCL Tech, target Rs 1,162: HDFC Securities

HCL Technologies (HCL Tech) is India’s fourth largest software company.

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Last Updated: Aug 27, 2019, 01.19 PM IST|Original: Aug 27, 2019, 01.15 PM IST
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HCL Tech has witnessed a strong traction for its digital services driven by Mode2 and Mode3 services, coupled with a large number of IP partnerships.
HDFC Securities has given a buy rating HCL Technologies for sequential price targets of Rs 1,162 (13.5 times FY21E EPS) and Rs 1,205 (14.0x FY21E EPS) on healthy order pipeline, focus on fast growing and high margin verticals, expected margin rampup in the near to medium term due to lapsing of one-off expense and consolidation of IBM business, strong positioning across verticals, resulting in growth and better margins and as the fastest growing large IT companies with better industry productivity.

HCL Technologies (HCL Tech) is India’s fourth largest software company, and one of the fastest growing IT services brands globally. HCL has focussed on transformational outsourcing, and offers an integrated portfolios of services including software-led IT solutions, remote infrastructure management, engineering, R&D services and BPO. HCL Tech helps global enterprises to restructure their businesses via innovative technology solutions built around Digital, IoT, Cloud, Automation, Cyber Security, Analytics, Infrastructure Management and Engineering Services.

HCL leverages its extensive global offshore infrastructure, and operates out of 44 countries to provide multi-service deliveries in key industry verticals including Financial Services, Manufacturing, Aerospace and Defence, Telecom, Retail and CPG, Life Sciences and Healthcare, Media and Entertainment, Travel, Transportation and Logistics, Automotive, Government, Energy and Utilities.

VIEW & VALUATION

HCL Tech has witnessed a strong traction for its digital services driven by Mode2 and Mode3 services, coupled with a large number of IP partnerships. We expect the ER&D space to continue to witness double-digit growth led by the major contribution coming in from Geometric and Butler America, going forward.

The company focuses on chasing large deals to capture market share from incumbents in consolidation deals. Being the leader in IMS practice and the third-largest engineering services player globally in revenue, the company is well positioned to win large deal wins. Strong deal wins along with acquisition of select IP products will help the company to drive growth going ahead. Recent Rupee weakness could be an added benefit.

IBM deal revenues are expecting to start flowing in from Q2. Recovery in organic growth trajectory (converged with larger peers), supported by large deal momentum (Nokia, Broadcom, Xerox) and differentiation in IMS (benefiting from vendor consolidation) and ER&D (scale) are things that impress.

“We feel investors could buy the stock at the CMP and add on dips to Rs 1,023-1,035 band (~12x FY21E EPS) for sequential targets of Rs 1,162 (13.5x FY21E EPS) and Rs 1,205 (14.0x FY21E EPS). At the CMP of Rs 1,087 the stock trades at 12.6 times FY21E EPS, the brokerage said.

It said the key concerns for the stock include a shift in demand to cloud-based business is a concern for its core business; large intangible assets which can impact profitability because of higher amortization, rising competition, possible rupee appreciation against the dollar and unfavourable US Visa norms.

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