“BUY” This Large Cap IT Stock With A Target Price of Rs. 1339: HDFC Securities

One of the leading brokerage houses, HDFC Securities Limited, has advised investors to buy the shares of HCL Technologies Limited. The brokerage has set a target price of Rs. 1339 for the stock, implying a 17 percent gain over the current market price of Rs. 1144 in six months. The brokerage in its research report has said that HCL Tech reported marginally better numbers in Q2FY22. HCL Tech expects revenue to grow in double digits in constant currency for FY22. EBIT margin is expected to be between 19% and 21% for FY22E. Consolidated revenue grew by 2.9% QoQ and 11.1% YoY to Rs 20,655 crore in Rupee terms. Revenue stood at US$ 2,791 mn; up 2.6% QoQ & up 11.3% YoY and revenue in Constant Currency stood up 3.5% QoQ and 10.5% YoY. EBIT was down by 0.4% QoQ and 2% YoY to Rs 3,916 crore. Net profit was up by 1.5% QoQ and 3.9% YoY to Rs 3,264 crore in Q2FY22. HCL Technologies total tax expense in Q2FY22 was at Rs 846 crore, while it was Rs 894 crore in Q1FY22. According to HDFC Securities the companys On the operating front, Mode 2 has been the prime driver of growth. Mode 1 business grew by 6.1% YoY and 2.8% QoQ, Mode 2 was up by 36.3% YoY and 12.5% QoQ and Mode 3 de grew 10.5% YoY and 7.6% QoQ. Mode1-2-3 contributed 60.9%, 25.8%, 13.3% to revenue in Q2FY22, respectively. On the vertical front, the company reported all-around growth across verticals and geographies YoY on a constant currency basis. Growth momentum led by Life sciences & Healthcare (20.1% YoY cc), Telecommunications, Media, Entertainment and Publishing (13.4% YoY cc), Manufacturing (11.9% YoY cc), Technology & Services (10.8% YoY cc). Total headcount at 187,634 with a net addition of 11,135 in the quarter vs. 7,522 in Q1FY22.Advertisement HDFC Securities has claimed that HCL Techs reported net new deals worth US$ 2.25bn (+35% QoQ, +38% YoY), including 14 transformational deals (13 large service deals and one product deal across verticals) in Q2FY22 and TCV of new deal wins in Q1FY22 stood at US$ 1.664bn enabled by 8 large services deal wins and 4 significant product wins, many are transformational deals across the verticals. New deal total contract value (TCV) in FY21 stood at US$ 7.3bn, which is an 18% increase over FY20. Robust growth is expected in services, led by strong deal momentum. Thus, the deal pipeline is at an all-time high, its robust deal pipeline and positive demand environment could bring better earnings visibility going forward. The companys strong order book & continuous ramp up on hiring driven by underlying macro should aid a fairly normalised growth in H2FY22. Also, on the back of strong deal pipeline and clients spending more on cloud and digital transformations, the company has guided a double-digit revenue growth for FY22E with EBIT margins expected to be in the band of 19-21%. According to the research report of the brokerage HCL Techs investments in last few years were in next-gen technologies which have helped to sustain momentum during these difficult times and positioned strongly to leverage the emerging market opportunities. HCL Tech has actively expanded its global footprint with its next-generation services and products. Over the past two years, the company has been steadily increasing its share of digital revenues driven by its Mode 2and Mode 3 segment (contribution has increased from 23.4% in fiscal 2018 to 38.6% in fiscal 2021). The major acquisitions including Actian and C3i Solutions (in April 2019) and DWS (in September 2020) will further support this long-term business expansion towards providing digital solutions. We had initiated coverage on 06 July 2020, re-initiated coverage report on 07 Dec 2020 and stock Update on 11 Aug 2021 on HCL Technologies Ltd, and stock achieved targets before the expiry of the call. Given healthy growth outlook and strong deal intake in Q2FY22, we have now revised earnings and increased target price for the stock. HDFC Securities has clarified in its research report that The company expects healthy double-digit growth in revenues in FY22E mainly led by improved growth in IT & business services and ER&D. With improvement in large deal wins, expansion in geographies, investment in sales & capabilities, we expect HCLT to register 13.2% CAGR in FY21-24E. According to the brokerages call HCL Tech could do well over the next few years driven by underpenetrated ERD opportunity, integrated deals in IT services and improving deliveries in digital. Its service line capabilities and drivers of growth are a lot more diverse today as opposed to the IMS dependence of the past; this lends comfort to the durability of growth. HCL Tech has strong R&D heritage, derives 15% of revenues from ERD and is the largest India based player with revenue of US$1.5 bn. HDFC Securities in its research report has stated that The stock is currently trading at a reasonable valuation of 18.4x Sept FY23E EPS which is at a steep discount to TCS and Infosys. A strong deal pipeline, strong profitability, solid operating cash generation and zero debt status could re-rate the stock which can eventually result in the reduction of difference between HCL Tech valuation and other Tier-1 IT companies like TCS and Infosys. We believe the base case fair value of the stock is Rs 1271 (20x Sept FY23E EPS) and the bull case fair value of the stock is Rs 1339 (21x Sept FY23E EPS) over the next two quarters. Investors can buy at LTP and add further on dips in the Rs 1042-1062 band (16.5x Sept FY23E EPS). At the LTP of Rs 1171, the stock is trading at 18.4x Sept FY23E EPS. The stock has been picked from the brokerage report of HDFC Securities Limited. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.