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

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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

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
 

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

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

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.

Story first published: Sunday, January 16, 2022, 10:47 [IST]
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