Trading 3% Near To Its 52-Week High, This IT Stock Gets A Buy Call For Solid Returns

The brokerage house HDFC Securities has placed a buy call on the shares of HCL Technologies. As of 3:30 p.m. IST on 14 January 2022, the stock was trading at a market price of Rs. 1,330, and the brokerage anticipates the stock to hit a target price of INR 1,485. HCL Technology is a large-cap company with a market capitalization of Rs 362,871.30 crore. According to the NSE, the stock hit a 52-week high of Rs 1,377.75 and a 52-week low of Rs 891 on September 24, 2021 and May 3, 2021, respectively. As of now, the stock is trading 3.46% lower than its 52-week high and 49.27 percent higher than its 52-week low.

Q3FY21 highlights according to the brokerage

HCLT's delivered decade-best revenue growth of +7.6% QoQ CC, higher than our estimates (+4.4% QoQ), supported by ER&D and P&P business (seasonally strong); (2) IT&BS segment grew +4.7% QoQ CC, led by digital and cloud transformation, while ER&D grew +8.3% QoQ CC and P&P registered +24.5% QoQ CC, driven by renewals and new license; (3) among the verticals, growth was led by technology (+14% QoQ CC), followed by retail & CPG (+11.5% QoQ CC) and telecommunications & media (+11.3% QoQ CC); (4) TCV of USD 2.14bn was >2bn for the second consecutive quarter; (5) consolidated EBIT margin remained flat (+8bps QoQ) at 19%, led by healthy margins in P&P business (32%), offset by a decline in IT&BS margins (-220bps); (6) attrition inched up to 19.8% (+140bps) and the company hired ~16K freshers in 9M (and plans to hire 22K in FY22E).

The brokerage’s outlook on HCL Tech

We have factored in USD revenue growth at +13.1/13.5/12.4%, IT&BS growth at +14.7/14.9/12.9%, ER&D growth at +15.1/16.8/15.3%, and P&P growth at +3/1.2/4.5% for FY22/23/24E respectively. EBIT margins are estimated at 19.2/19.3/20.3% over the same period, translating into an EPS CAGR of 14% over FY21-24E (TCS/INFOSYS/WIPRO at 15/17/16% CAGR). Valuation, at ~20x FY24E, is inexpensive with ~4% FCF yield and ~24% return on invested capital (RoIC).

Buy With A Target Price of INR 1,485

HDFC Securities has claimed that "We maintain BUY on HCL Tech (HCLT), supported by strong growth in services (+5.3% QoQ CC) and recovery in P&P (+24.5% QoQ CC). The services growth was led by ER&D but the ~200 bps decline in margin was higher than peers. Key attributes that support our growth outlook are (1) growth momentum in ER&D services (+8.3 QoQ CC), supported by digital engineering and IoT services; (2) robust TCV of USD 2.14bn (+64% YoY growth), led by eight large deals in services and product; and (3) strong fresher hiring, which will continue in FY23E. HCLT has maintained its P&P guidance (0-1%) despite the recovery in Q3 (indicating a steep decline in Q4); however, the overall guidance of double-digit growth remains unchanged."

The brokerage has further highlighted that "The margin guidance is maintained at 19-21%; however, considering the decline in the services margin, EBIT% for FY22E will be at the lower end of the guidance. We have increased the revenue estimates for FY23/24E by +1.2/1.7% and reduced EPS estimates by 5.3/1.6% due to a lower margin. We maintain our BUY rating with a target price of INR 1,485, valuing the HCLT stock at 22x Mar-24E EPS, factoring in +13/14% CAGRs in revenue/EPS over FY21-24E."

Disclaimer

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