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Pick Of the Week – HCL Technologies



We hereby present you our investment idea for Equity Investment i.e “Pick of the Week”. A thorough analysis of company, industry and economy goes behind our stock ideas for you. With the “Pick of the Week”, you may earn superior returns in stock market over a time horizon of 6 – 9 months.



INVESTING RATIONALE


• Quarterly performance: HCL Tech reported revenue growth of 3.5% QoQ (3.3% in cc) , but soft margin (largely due to Mode 3 seasonality). IMS delivered another strong quarter (+7.3% QoQ in cc terms).

• Improved visibility due to strong deal wins: Strong deal wins along with healthy outlook for BFSI and IMS is expected to drive growth going forward. Receding headwinds in BFSI, sustained momentum in IMS and ramp up of deal provide revenue visibility. The company signed 17 transformational deals in Q4. Deal pipeline has improved QoQ which leads to better revenue momentum/ visibility in FY20.

• Improving revenue trajectory: Management’s guidance of 14-16% growth is in line with peers, while its organic growth at 7-9% is marginally higher than last year’s growth of 6.5%. We expect steady improvement of revenue growth due to (a) record deals over past few quarters TCV (USD 2-3bn/quarter) , (b) broad-based growth across key service segments and (c) IMS segment regaining momentum with ~21% y-o-y growth.

• Margins to improve going forward: We expect improvement in margin trajectory from H2FY20 led by revenue contribution from IBM deal, which is a high-margin business, waning seasonality impact of Mode 3 business that has lower IP revenue in Q4 and stronger growth in Mode 2 driving operating leverage.

• We have a Buy with a target price of Rs. 1,235



WE RECOMMEND


  • CMP

    Rs.1088

  • Target Price

    Rs.1235

  • Potential Upside

    13.5%


* Note: Stock Investment horizon Approx. 6-9 months. CMP as on 10th May, 2019.

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