HCL Technologies
Estimate change
TP change
Rating change
Bloomberg
Equity Shares (m)
M.Cap.(INRb)/(USDb)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
12M Avg Val (INR M)
16 January
2021
3QFY21 Results Update | Sector: Technology
CMP: INR989
TP: INR1,300 (+31%)
Buy
Product driven 3Q beat should ease viability concerns
All round performance; expect mid-teen growth for FY22
HCLT IN
2,714
2684.9 / 38.2
1074 / 376
6/25/49
5192
Financials & Valuations (INR b)
Y/E Mar
2021E 2022E 2023E
761
875
990
Sales
21.6
21.8
22.1
EBIT Margin (%)
130
153
176
PAT
48.0
56.5
65.0
EPS (INR)
18.0
17.5
15.1
EPS Gr. (%)
217
241
260
BV/Sh. (INR)
Ratios
RoE (%)
RoCE (%)
Payout (%)
Valuations
P/E (x)
P/BV (x)
EV/EBITDA (x)
Div Yield (%)
23.6
20.8
37.5
20.6
4.6
12.4
1.8
24.6
21.7
50.0
17.5
4.1
10.6
2.9
25.9
22.9
60.0
15.2
3.8
9.3
3.9
Shareholding pattern (%)
As On
Promoter
DII
FII
Others
Dec-20 Sep-20 Dec-19
60.3
60.3
60.0
10.3
10.7
8.5
24.9
24.9
27.7
4.5
4.1
3.9
FII Includes depository receipts
HCL Technologies (HCLT) delivered strong revenue growth (3.5% QoQ CC) in
3QFY21, above our expectation and its guidance, led by stronger than
expected seasonality in the Products and Platforms vertical (P&P, +8.3%
QoQ in CC) and continued traction in Mode 2 services (+10.9% QoQ in CC).
We expect HCLT to return to mid-teens growth in FY22 (14% YoY in CC USD)
as continued strength in P&P – due to improving deal wins and new client
additions – complements improving demand environment in IT Services and
R&D verticals. The P&P business should deliver low teen USD revenue
growth over the next two years.
We view the improvement in deal wins (+13% YoY), robust deal pipeline, and
large ER&D exposure (~16% of revenue) as positive. It should also continue
to benefit from high demand for Cloud migration (Digital foundation) work.
EBIT margin expanded by 130bp QoQ to 22.9%, driven by lower SG&A
spends (+80bp) and increased offshoring (+50bp), despite a partial wage
hike impact (-50bp). While we see a wage hike and sales investments as
margin headwinds in FY22, it should also benefit from growth led positive
operating leverage. We expect the company to report 21.8% EBIT margin, up
20bp YoY, but still 110bp below the peak delivered in 3QFY21.
We expect HCLT to deliver 4Q revenue growth and FY21 EBIT margin at the
upper end of its guidance band of 2-3% and 21-21.5%, respectively.
For 9MFY21 it delivered sales (USD)/EBIT/PAT growth of 1.2%/21.2%/20.1%.
Along with robust operational performance, cash conversion (percentage)
for the company more than doubled in 9MFY21 with FCF/PAT at 150% as
against 63% in FY20.
HCLT is our preferred pick in IT Services space, and also a part of our model
portfolio.
We upgrade our EPS estimate for FY21E/FY22E/FY23E by
4%/4%/7%. Maintain
Buy
as we expect HCLT to re-energize its Products
business, while keeping positive traction in the Services business, driven by
higher IMS/Cloud focused deals. Our TP of INR1,300 per share implies 20x
FY23E EPS (~20% discount to TCS).
In constant currency (CC), revenue grew 3.5% QoQ in 3QFY21, above our
estimate of 2.2%.
Mode 1 (61% of business) grew 0.1% QoQ, Mode 2 (23%) grew 11% QoQ,
and Mode 3 (16%) was up 7.1% QoQ CC. Growth in Mode 2 was led by good
traction seen in Cloud native and Digital programs.
Growth was driven by Telecom/Media/Entertainment vertical, up a
significant 12% QoQ CC. Other key contributors were Technology and
Services (+6.8% QoQ CC) and Manufacturing (+5.6% QoQ CC).
HCLT won 13 large deals across industry verticals, including Life Sciences and
Healthcare, Technology, and Financial Services.
Performance ahead of estimates
Mukul Garg – Research analyst
(Mukul.Garg@MotilalOswal.com)
Research analyst: Anmol Garg
(Anmol.Garg@MotilalOswal.com) /
Heenal Gada
(Heenal.Gada@MotilalOswal.com)
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Investors are advised to refer through important disclosures made at the last page of the Research Report.