Buy This Large Cap IT Stock With A Target Price of Rs. 1,600 Says Axis Securities

Key investment rationale for HCL according to Axis Securities

• The management foresees a strong demand environment and expects the company to deliver encouraging growth over the next 5 years along with the industry growth. While the company expects cost take-out deals to witness near-term traction, it sees digital transformation spending to be more structural.
• Synergies are currently anecdotal and the management foresees significant cross-selling opportunities within both product as well as services clients. Keeping this in perspective, the management plans to further invest in Sales & Marketing for this business. We are optimistic about the P&P business which will help the company improve its operating efficiency in the longer term. It is witnessing robust traction in the products like HCL DX and HCL Commerce.
• Engineering and R&D Services grew at a robust 8.3% QoQ in CC (19.7% YoY in CC) driven by traction in digital engineering and IoT Works. IT and Business Services grew at a healthy 4.7% QoQ CC (15.3% YoY CC), driven by an acceleration in cloud transformation and application modernization deals.
• Hiring continued at a brisk pace with a net addition of 10,143 during the quarter. The total headcount now stands at 197,777. HCL Tech Q3FY22 attrition in IT Services increased by 390bps to 15.7%. Employee count increased by 11,135, taking the total headcount to 1,87,634. HCL Tech also declared a dividend of Rs 10/share.
• The company continued with its strong client addition across all categories. On a YoY basis, $50 Mn+ clients are up by 11, $20 Mn+ clients by 13, $10 Mn+ clients by 25, $5 Mn+ clients by 34, and $1 Mn+ clients are up by 50.
• Mode 2 business showcased robust growth of 30.2% which includes cloud transformation and IoT machine learning. The management continues to foresee favourable macroeconomic demand scenarios in the medium to long term.
• HCL plans to acquire a 100% stake in Starschema - a limited liability company incorporated in Hungary, for total cash consideration of US$ 42.5 Mn. With this acquisition, HCL would enhance its capabilities and solutions in Data Engineering which will accelerate the growth of Mode 2 services in Digital Engineering and Near-shore Eastern European markets along with augmenting its ability to scale. The transaction is expected to conclude by Mar'22. Moreover, the company has also announced an acquisition of a 51% equity stake in the German IT consulting company Gesellschaft für Banksysteme GmbH (GBS), along with apoBank that would hold the balance 49% of equity. The strategic partnership would drive digital transformation and innovation for the German financial services sector. HCL has paid Euro 99,000 as the purchase consideration for its 51% stake. The transaction has been completed with effect from January 5th, 2022.

Buy With A Target Price of Rs. Rs. 1,600

The brokerage has claimed in its research report that "HCL Tech has built a resilient business model by securing multiple and high-value long-term contracts with the world's leading brands. Furthermore, a strong deal pipeline and superior service mix will help the company attain leading growth in FY22 as well as in FY23. We recommend a BUY on the stock and assign a 24x P/E multiple to its FY24E earnings of Rs 67.4/share which gives a TP of Rs 1,600/share, indicating an upside of 20% from current market price (CMP)."

Disclaimer

The above stock has been picked from the brokerage report of Axis Securities. 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.