Buy HCL Technologies With A Target Price of INR 1,430: Motilal Oswal

Motilal Oswal’s take on HCL Technologies

The brokerage has said in its research report that "We expect the robust performance in HCL's Services business, especially the ER&D vertical, to continue as the demand environment remains favorable. We also draw comfort from improving management commentary on continued growth momentum in the IT Services business. Sustainable demand momentum for Cloud and Digital Engineering benefits HCLT, given its large presence within IMS and ER&D and continued investments in capabilities. Strong headcount additions and deal wins reflect the management's confidence in the sustainable growth momentum."

According to Motilal Oswal "We continue to see potential in HCLT's Products and Platforms business. While the recent departure of the head of Products has elevated concerns on business recovery. However, we don't see a meaningful risk of a further hit from this event, our sensitivity analysis (Exhibit 7) suggests a limited impact on EPS even in a bear case (4% decline in revenue for the Products and Platforms business in FY23E would lead to a 2.6% drag on our EPS estimate)."

The brokerage has also claimed that "On a combined basis, HCLT should deliver USD revenue growth of 13.1% over FY21-23E. We expect the EBIT margin to stabilize at 20% in FY23E, which should help it deliver 14.3% PAT CAGR over FY21-23E. The company has been constantly improving its shareholder payouts. It has recently announced a dividend payout policy, which implies a distribution of at least 75% of net income over a five-year period. The management has revised its quarterly dividends to INR10/share (from INR6/share) for FY22. The quarterly DPS has been continuously moving up to INR10/share in 2QFY22 v/s INR1/share (adjusted for the stock split) in FY19."

"The 75% payout ratio would be the highest in the past 15 years. We see this commitment as a strategic shift to focus on organic growth and limit inorganic
investments to bolt-on and capability-based acquisitions (v/s large revenue accretive acquisitions)" the brokerage further said in its research report.

What should investors do?

Motilal Oswal in its research report has said that "Given its deep capabilities in IMS and strategic partnerships, investments in Cloud, and Digital capabilities, we expect HCLT to emerge stronger on the back of an expected increase in enterprise demand for these services. The stock is currently trading ~20.1x FY23E EPS, which offers a margin of safety. Our TP is based on 25x FY23E EPS. We maintain our Buy rating as we expect traction in the Services business in 2HFY22E and FY23E, driven by higher IMS/Cloud-focused deals."

Disclaimer

The above stock has been picked from the brokerage report of Motilal Oswal. 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.