Maintain BUY on HCL Technologies - Mode-2, 3 driven momentum - HDFC Securities

Ms. Apurva Prasad, Institutional Research Analyst, HDFC Securities & Mr. Amit Chandra, Institutional Research Analyst, HDFC Securities

We maintain BUY on HCL Tech (HCLT), based on solid 3Q and a strong outlook across multiple growth vectors. Large deal momentum (>13% YoY and 13 transformational deals >USD25mn TCV in 3Q) and pipeline at nearly an all-time high (many USD 200-300mn deals) supports the growth outlook. Operational highlights include offshore-led improvement in ER&D and IT & Business services margins and continuity in strong cash generation with OCF/EBIT at 114% (119% in 2Q). P&P business traction (>14,000 customers 6,000 sales transactions across new and renewals) is expected to continue (beyond 4Q weak seasonality), supported by new product releases (15+ in 3Q), strong deal activity (USD 91mn net new license bookings) and more cross-sell/up-sell transactions across products/services. The absence of large acquisitions and subsequent accretion to FCF/payout are upside risks to valuations. Our target price is Rs 1,110 at 18x Dec-22E (15% EPS CAGR over FY21-23E).

3QFY21 highlights: (1) HCLT's revenue came in marginal above our estimates at 4.4% QoQ (3.5% QoQ CC), supported by +2.7% QoQ CC in IT & BS, +2.5% QoQ in ER&D and +8.3% QoQ in P&P segment. (2) EBIT margin was 22 quarter high at 22.9% (+127bps QoQ) supported by SG&A leverage (+50bps), Offshoring (+50bps), revenue catch up in Mode 2 & Mode 3 (+80bps), offset by wage hike (-50bps). (3) Growth was broad-based across the verticals with TME/Tech/Mfg/Retail delivering 12.1/6.8/5.6/3.7% QoQ respectively (CC terms). (4) 4QFY21 margins to be impacted by wage hike impact (-80 to -90 bps). (5) Revenue guidance revised at +2% to +3% QoQ (CC terms) for 4QFY21E while EBIT margin guidance revised upward to 21- 21.5% for FY21E.

Outlook: We have factored in USD revenue growth at +2.4/13.1/10.5%, factoring in IT & BS growth at +0.6/13.7/10.4%, ER&D growth at -4.2/+11.8/+12.6% and P&P growth at +23.1/11.7/8.6% over FY21/22/23E respectively. EBIT margins are estimated at 21.6/21.7/21.9% over the same period, translating into an EPS CAGR of 15% over FY21-23E (TCS/INFY at 19/20% CAGR).

Shares of HCL TECHNOLOGIES LTD. was last trading in BSE at Rs.980.95 as compared to the previous close of Rs. 989.4. The total number of shares traded during the day was 394140 in over 14965 trades.

The stock hit an intraday high of Rs. 1004.75 and intraday low of 977. The net turnover during the day was Rs. 390132110.

Source : Equity Bulls

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