HCL Technologies - Strong quarter; modest near-term outlook - ICICI Securities

HCL Technologies' (HCLT) reported revenue and EBIT margins were ahead of our estimates. Barring a few key segments (e.g. Europe, Financial Services), the company reported a strong and broad-based comeback. In line with revenues, margins too improved. Despite the beat and strong deal bookings, revenue growth outlook for H2FY21 remains modest due to seasonality. The increase in margin guidance was on expected lines. As highlighted in our recent sector thematic (link), HCLT's combined exposure to deeply troubled verticals (e.g. energy, TTH) is lower vs peers, which is positive on two counts: 1) the company should find it relatively easy to bounce back to pre-Covid levels, and 2) our channel checks suggest that, while heavily disrupted industries are considering public cloud migrations as a way of 'variabalising' fixed costs, moderately impacted ones (e.g. BFSI) are still inkling towards hybrid cloud architecture as their target operating model. HCLT should be a key beneficiary of this hybrid cloud adoption.

- Beat on both revenues and EBIT margins. Growth during the quarter was broad-based across segments - IT & Business Services (+4.9% QoQ, CC), ER&D (+3.6% QoQ, CC), Products & Platforms (+3.1% QoQ, CC). Across the key geographies, while Americas (+4.9%) reported strong comeback, Europe (+2.2%) remained soft. This was despite the recovery of key European economies from Covid and is attributable to seasonality in certain accounts. Barring financial services and manufacturing, all the other key verticals reported strong comeback. EBIT margins expanded ~110bps QoQ to 21.6% led by the increase in gross margins.

- Modest outlook for H2FY21. Despite the beat in Q2FY21 and strong deal bookings, revenue CQGR for H2FY21E remains stable at 1.5%-2.5% QoQ (CC). The modest outlook factors-in seasonality of the second half of the fiscal. However, EBIT margin guidance for FY21 has been increased from 19.5-20.5% in the previous quarter to 20.0-21.0%.

- The under-appreciated outperformer! Key positives for HCLT are: 1) recent strength in its deal win momentum, and 2) improved focus on digital. Currently, even as the company operates close to its sweet-spot EBIT margins, we expect ~200bps improvement over FY20-FY23E aided by its Mode-3 strategy and operational efficiencies. Industry-leading revenue CAGR (FY20-FY23E: 8% in USD terms), potential surprise on payout ratios, and inexpensive valuations (15.5x FY22E EPS) underpin our strong BUY rating with an unchanged target price of Rs1,150.

Shares of HCL TECHNOLOGIES LTD. was last trading in BSE at Rs.827.1 as compared to the previous close of Rs. 859.45. The total number of shares traded during the day was 723337 in over 21298 trades.

The stock hit an intraday high of Rs. 877 and intraday low of 821. The net turnover during the day was Rs. 604908554.

Source : Equity Bulls

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