Sharekhan Maintains Buy Rating Amid Lower Than Expected Result For HCL, Gain 23% Return

Renowned brokerage firm Sharekhan suggests buying the stocks of HCL Technologies Ltd. The company's services business (IT business + ERD) revenue growth was moderated to 2.3% QoQ in Q1FY2023 after reporting more than 5% QoQ CC growth for the last 3 consecutive quarters.

Stock To Buy: Target Price, Current Market Price

The Current Market Price (CMP) of HCL Technologies is Rs. 928. Sharekhan has estimated a Target Price for the stock at Rs. 1,140. This stock has the potential to give a 22.84% return, in the upcoming 1 year. This is a large-cap stock with a market capitalization of around Rs. 248,680 crore.

Stock Outlook
Current Market Price (CMP)	Rs. 928
Target Price	Rs. 1,140
Potential 1 year return	22.84%
52 week high share price	Rs. 1,377.75
52 week low share price	Rs. 905

The company has reported a 2.4% YoY gain rise in net profit at Rs. 3,283 crore in Q1FY23, while it was recorded at Rs. 3,213 crore in Q1FY22. Its total income was at Rs. 23,464 crore in Q1FY23, up 17% against Rs. 22,597 crore in Q1FY22. EBIT margins declined 100 bps to 17%. The reports have missed estimates by some analysts, so the company's share price has fallen marginally today. However, Sharekhan thinks, "HCL Tech delivered in-line revenue growth with a steady progression of clients across higher size buckets and healthy deal wins, while EBIT margin remained below expectations owing to supply-side pressures, delay in the hike in realizations and rising travel expenses."

Stock advantages: Sharekhan

Amid a lower-than-expected result for the company, Sharekhan maintains a buy rating for the stock, given the strong growth in application services, good dividend payout, healthy order intake, and reasonable valuation. Sharekhan said, "HCL Tech is expected to achieve its revenue growth guidance in FY2023E given its strength in digital foundation, unique integrated infrastructure and app services, and presence in the fast-growing ERD segment. The management believes that strong demand momentum would continue in the near-term because of higher enterprise spending on digital transformation, IT operating model transformation, and consulting offerings. HCL Tech's strength in digital foundation and modern applications position the company to capture a reasonable share of the market opportunity."

The firm added, "Cash generation, net staff addition and attrition rate remained weak. The management reiterated its revenue growth guidance of 12-14% on CC terms, in line with our expectations, and 18-20% for EBIT margin for FY2023 despite supply side pressures, and delay in hike in realisations." Additionally, as the key risk, Sharekhan mentions, "Any integration issues in ongoing M&A activities, especially IP-related transactions, could impact earnings. Further, high dependence on IMS could create challenges to its revenue growth trajectory."

Company profile:

HCL Tech is a leading global technology company providing software-led IT solutions, remote infrastructure management, BPO services, and engineering-related services. Further, the company helps global enterprises re-imagine and transform their businesses through digital technology transformation. HCL Tech leverages its global network of integrated co-innovation labs and global delivery capabilities to provide holistic multi-service delivery in key industry verticals. Hence, the company reiterated its 12-14% revenue growth guidance for FY2023E. The company is expected to achieve lower end of EBIT margin guidance given innovative pricing, optimisation of operating costs, pyramid rationalization, fresher addition and higher utilisation.

Disclaimer

The above stock was picked from the brokerage report of Sharekhan. 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.