Buy This Multibagger IT Services Stock, Shares Likely To Give Robust Returns, Says Kotak Securities

Kotak Securities maintains a BUY rating on HCL Technologies Limited (HCLT) with an unchanged target price of Rs 1,250. If Investors buy the stock of the company at the Current Market Price, considering the estimated target price, they can expect a gain of 22% in 12 months. HCL is a leading global IT services company having a market cap of Rs 2,79,073 crore.

Stock Outlook & Returns of Investments

The current market price of HCLT's stock on NSE is Rs 1,028.40 apiece. The 52 week low of the stock was recorded on 15 July 2022 at Rs 877.35 and the 52 week high was recorded on 13 January 2022 at Rs 1,359.40, respectively.

The stock fell 0.06% in the last 1 week and 5.71% in the last 1 month, respectively. In the past 3 months, it surged 7.62%. Over the past 1 year, it gave 11.51% negative return. Whereas, in the past 3 years, it gave 91.74% positive returns. In the past 5 years, it gave a 135.01% multibagger return.

Macro impact on demand a tad higher than expected; bookings remain robust

HCLT had guided for revenue growth of 13.5-14.5% in c/c for FY2023E. The impact of macro on demand, drop in discretionary spending in hitech, telecom and a few other verticals, and furloughs has been higher than expected. The company now expects revenue growth for FY2023E to be at the lower end of its guidance band. Our current revenue growth forecast of 14.1% in c/c for FY2023 has a downside risk of ~50 bps. The bookings trend will likely be robust for the December 2022 quarter and reasonably healthy in 2HFY23.

Vendor consolidation trend to increase; HCLT will be a beneficiary

HCLT expects an increase in vendor consolidation trends due to a few factors- (1) clients wish to narrow down the vendor list to strategic partners who can scale up digital transformation, (2) quite a few large vendors are on a weak footing, (3) share gains from smaller firms and boutiques as clients scale digital transformation throughout the enterprise, and (4) operating model change with focus on product IT architecture leading to integrated buying of previously separate stacks, such as application support, application development and infrastructure. The company is confident of emerging as a beneficiary from the trend.

Balanced portfolio mix with applications leading the way

The services portfolio is closer to clients' spending patterns compared to the heavy dependence on IMS and ER&D in the past. The applications portfolio will continue to strengthen. The digital business, including consulting, modern apps and data/analytics, drove 50% of incremental growth in FY2022. The company will continue focus on accounts with large tech spends which aided growth in FY2022- 85% of growth from ~50 accounts (35 existing and 15 new with 40 from f-500/ G-500 stable).

Aspires to reach 19-20% EBIT range soon

Key margin levers include (1) an increase in bill rate enhancements and realization rates although the current environment is not ideal for a pricing increase, (2) pyramid optimization aided by higher fresher hiring, (3) operational efficiencies, and (4) higher nearshoring.

Maintain BUY; expect consistent industry-matching growth

The strength in applications, higher ER&D mix and leadership in IMS will lead to a more consistent industry-matching growth profile in the medium term. The large deal engine is firing well with more opportunities, given the rising trend in vendor consolidation and cost efficiency focused deals. The margin profile can improve further with the easing of talent related headwinds. The attractiveness of the stock has reduced a tad following the recent rally. Maintain BUY with an unchanged FV of Rs 1,250. 

Disclaimer

The stock has been picked from the brokerage report of Kotak Securities. Greynium Information Technologies, the Author, and the respective Brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.