Buy This Software Stock For Gains Up To 21%, Fell 33% From Highs

Motilal Oswal has recommended investors to buy the stock of HCL Technologies (HCLT) for gains up to 21% with a target price of Rs 1110 apiece. HCLT delivered a revenue growth of 2.7% QoQ CC in 1QFY23 (60bp below our estimate) due to weaker growth in IT Services (+2% QoQ CC), partly compensated by better delivery in ER&D services (+3.7% QoQ CC) and a favorable seasonality in P&P (+5.1 QoQ CC).

1. Stock Outlook

The current market price of the stock is Rs 917 apiece and Motilal Oswal has given a target price of Rs 1110 apiece with a potential upside of 21%. The 52-week high of the stock is Rs 1377 apiece and 52-week low is Rs 905 apiece.

2. Muted IT services drag Q1 performance

HCLT delivered a revenue growth of 2.7% QoQ CC in 1QFY23 (60bp below our estimate) due to weaker growth in IT Services (+2% QoQ CC), partly compensated by better delivery in ER&D services (+3.7% QoQ CC) and a favorable seasonality in P&P (+5.1 QoQ CC). It reported stable new deal TCV of USD2.05b (down 6% QoQ, but up 23% YoY). The company maintained its FY23 USD CC revenue growth guidance of 12-14%.

EBIT margin at 17% (-90bp QoQ) was 90bp below our estimate, with IT Services/ER&D down 170bp/50bp, partly offset by strong P&P margin, up 340bp QoQ. Though HCLT maintained its margin guidance of 18-20%, it now expects margin to be at the lower end of its guided band. According to Motilal Oswal, "While we were disappointed by the weak growth in the IT Services business, adverse seasonality (productivity pass-through), and high base (three straight quarters of strong delivery) indicate limited future read-through. Moreover, the continued strong deal TCV (Services book-to-bill ratio of 0.8x) and pipeline commentary should help them improve growth in 2QFY23. We expect HCLT's Services business to do well in a favorable demand environment for Cloud migration and R&D outsourcing.

3. Key highlights

Digital and Cloud transformation continues to be the central theme for growth. Digital operation services, CX transformation, and Cloud smart led the growth in IT Services. The management is not seeing any slowdown in demand. It continued with its FY23 guidance of 12-14% CC growth. It expects margins to improve from current levels and guided the margin at the lower end of its guided band of 18-20% for FY23.

4. Valuation

According to Motilal Oswal, "Strong sequential growth within Services, robust headcount addition, healthy deal wins, and a solid pipeline indicates an improved outlook. Higher exposure to Cloud, which comprises a larger share of non-discretionary spend, offers a better resilience to its portfolio in the current context, with higher demand for Cloud, Network, Security, and Digital workplace services. Given its deep capabilities in the IMS space and strategic partnerships, investments in the 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 trading ~16x FY24E EPS, which offers a margin of safety. Our TP is based on 19x FY24E EPS. We maintain our Buy rating."

5. About HCL Technologies

HCL Technologies is a next-generation global technology company that helps enterprises reimagine their businesses for the digital age. Its technology products and services are built on four decades of innovation, with a world-renowned management philosophy, a strong culture of invention and risk-taking, and a relentless focus on customer relationships. The market capitalization is Rs 248,558 crore.

Disclaimer

The stock has been picked from the brokerage report of Motilal Oswal Financial Services. 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. Goodreturns.in advises users to check with certified experts before taking any investment decisions.