Maintain BUY on HCL Technologies - Mixed bag - HDFC Securities

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

We maintain BUY on HCL Tech (HCLT), following a mixed bag yet net positive performance. Key attributes that underscore our positive outlook include (1) highest-ever net-new deal win at USD 3.1bn TCV in 4Q and peak deal pipeline providing strong growth visibility (particularly in the IT & BS segment), (2) acceleration across portfolio (IT&BS, ER&D and ~75% of P&P), and (3) large deal momentum (including two wins of >USD 250mn TCV each and several >USD 100mn deals). However, some diversions to the positive hypothesis include (1) re-calibration of P&P (select products), which will dent growth (P&P low single-digit in FY22E) and (2) accelerated investments towards market expansion and scaling ER&D having margin implications. Nonetheless, the prospects of acceleration in Mode-2 (digital services), uptick in BFSI deals QoQ, synergies between P&P and services (20% of P&P pipeline through HCLT services channel), strengthening partner ecosystem, better FCF (highest FCF yield within tier-1 at >6.5%) and attractive valuations (16.4x FY23E) support the investment argument.

4QFY21 highlights: (1) HCLT's revenue growth of 2.5% QoQ CC (including 1% from DWS acquisition) came in line. (2) IT&BS segment grew at a robust 4.4% QoQ CC, ER&D was flat at 0.7% QoQ (impacted by Aero/Auto industry) and Products & Platform declined 4.9% QoQ (seasonality and product rationalization). (3) HCLT won 19 large deals in 4Q (58 wins in FY21), led by Manufacturing, BFSI, LS & healthcare verticals. (4) EBIT margin came at 20.3%, -260bps QoQ (ex-one-time bonus), impacted by wage (-60bps), P&P seasonality (-73bps), fresher hiring & other investments (-61bps) and FY22 wage hike starting 2Q. (5) The company has guided revenue growth of >10% CC and EBIT margin band of 19-21% for FY22E.

Outlook: We have factored in USD revenue growth at +12.8/10.8%, factoring in IT&BS growth at +15.4/11%, ER&D growth at +9.4/12.4%, and P&P growth at +3.3/7.4% over FY22/23E respectively. EBIT margins are estimated at 20.5% over the same period, translating into an EPS CAGR of 13% over FY21-23E (TCS/INFY/WPRO at 17/15/10% CAGR).

Shares of HCL TECHNOLOGIES LTD. was last trading in BSE at Rs.928.4 as compared to the previous close of Rs. 955.8. The total number of shares traded during the day was 648120 in over 38008 trades.

The stock hit an intraday high of Rs. 949 and intraday low of 923.5. The net turnover during the day was Rs. 603673223.

Source : Equity Bulls

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