Q3FY23 Review: HCL Technologies: Strong quarter, near-term outlook modest

13 Jan 2023 , 10:36 AM

Recommendation: Add

Target price: Rs1,100

 

HCL Technologies (HCL Tech) reported Q3FY23 USD revenue growth of 5% cc QoQ, above IIFL Capital Services’ estimate, driven by significantly higher growth in P&P (+30.5% sequentially) even as ER&D (+2.5% cc sequentially) and IT Services (+2.1% cc sequentially) were healthy. EBIT margins expanded to 19.6% (+160 bps QoQ), led by higher P&P revenues. 

For FY23, HCL Tech narrowed down its revenue growth guidance to 13.5%-14% cc and EBIT margin guidance to 18-18.5%, implying sequential revenue (-0.5% to -2%) and margin decline in Q4. Deal wins of USD2.35 billion in Q3 (+10% YoY) and 3k headcount addition, give some visibility on growth in H1CY23.

Analysts at IIFL Capital Services raise EPS estimates by 2-4% on higher growth and 12-month Target price to Rs1,100 (from Rs1,070), valuing it at 16 times 2-year forward estimated EPS. While the stock is trading at 17 times on FY24 estimated P/E— a 12% discount to peers— rerating would depend on reduced volatility in earnings delivery. INR movement and acquisitions are key downside risks.

Hence, analysts at IIFL Capital Services maintain Add recommendation on the stock.