Buy This IT Stock For 4% Dividend Yields, Attractive Valuations & Steady Cash Generation

HCL Tech recently declared numbers and Emkay Global remains bullish on the stock and has recommended a buy on the stock.

What makes the stock attractive?

HCL Tech according to Emkay Global, saw continued acceleration in Services and ER&D revenue, healthy deal intake (New deal TCV at USD2.3bn), broad-based revenue growth, 88% dividend payout.

Revenue grew 0.5% QoQ to USD2.99bn (1.1% CC), impacted by the seasonal decline in the products and platforms business. Revenue growth was aided by continued traction in the Services business (grown organically by over 5% CQGR in the last three quarters).

Products and platform services to be volatile

According to Emkay Global, the company expects the Products and Platforms business to be volatile in coming quarters; however, it did indicate that it was seeing good synergies between the Product and Services businesses (10% of deal pipeline for Services biz was from Product and Platform business clients).

"Revenue growth was led by Mode 2 offerings (7.8% QoQ CC) and Mode 1 offerings (3.5% QoQ CC), while Mode 3 offerings declined by 20.1% after a strong show in Q3. HCLT continues to see strong momentum in Cloud, Digital & Engineering services and has guided for 12-14% CC growth in FY23 (guidance implies 2.5%-3.2% CQGR in FY23) on the back of continued traction in the services business, healthy deal intake (USD8.3bn in FY22) and robust deal pipeline (close to all time high)," the brokerage has said.

Good on valuations and attractive on dividend yields

Emkay has cut FY23/FY24 EPS estimates by 3%/2.7%, factoring in Q4 performance and FY23 guidance.

"Revenue growth momentum is encouraging; however, pressure on Services margin led to earnings cut. We maintain Buy with a TP of Rs1,400 at 22x Mar'24E EPS considering attractive valuations, steady cash generation and 4% dividend yield," the brokerage has said.

Cash generation remains solid

Gross Cash stands at US$ 2,914 mn and Net Cash at US$ 2,388 mn at the end of March, which shows strong cash generation. HCL Tech also saw strong client addition across all categories. On YoY basis, US$ 100 mn+ clients up by 1, US$ 50 mn+ clients up by 8, US$ 20 mn+ clients up by 22, US$ 10 mn+ clients up by 30, and US$ 5 mn+ clients up by 31, US$ 1 mn+ clients up by 73.

The company ended the Financial Year 2021-22 well, with Revenue at US$ 11.5 bn (Rs 85k Cr), growth of 12.7% YoY in constant currency, and EBIT margin at 18.9%. Services revenue (ITBS and ERS) crossed the US$ 10 bn milestone and registered a robust growth of 14.9% YoY in constant currency during the fiscal. Net income (PAT) for the year came in at Rs 13.5K Cr, 15.7% of Revenue, translating to an EPS of Rs 49.77. Our cash generation and profit conversion to cash continue to be very strong with OCF at US$ 2,265 mn (125% of PAT) and FCF at US$ 2,044 mn (113% of PAT).

Disclaimer

Investing in equities poses a risk of financial losses and investors should understand the nature of the risk. 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.