India
NRI
Pick Of the Week – State Bank of India
Every week, we recommend a well-researched fundamental equity investment as our ‘Pick of the Week’. Handpicked after a thorough analysis of the business, industry, and economy, this recommendation has a higher potential of earning good returns over a horizon of 6 - 9 months.
Investment Rationale
Healthy growth aided by Product and Platform business: HCL Tech reported better than expected Q3FY20 numbers on both margin and revenue front. The revenue in constant currency terms grew by 2.1% QoQ and 16.4% on YoY at Rs. 18,135 crs. Net income also showed a robust growth of 13.4% QoQ at Rs. 3,037 crs. The Mode 3 business grew by 11.1% QoQ driven largely by product and platform business. Mode 2 businesses vertical grew by 1.1% QoQ, while Mode 1 business vertical grew by 0.3% QoQ. Operating margins have improved by 70 bps at 24.7% aided by higher margin in product and platform segments. Growth in Mode 2 and Mode 3 business will lead to margin gain and higher growth momentum.
Key verticals showed a robust growth: The company has posted strong broad based growth across verticals in the Q3FY20. On vertical front, Financial Services vertical grew by 16.8% YoY, Manufacturing vertical grew by 38.1% YoY, Retail & CPG vertical grew by 16.9% YoY, Energy Utilities and Public Services vertical grew by 31.3% YoY, Life sciences & Healthcare segment grew by 8.9% YoY, Media and Telecom vertical grew by 13.6% on YoY basis. This will make business structure more robust.
Robust deal pipeline will help HCL Tech to attain sustainable long-term growth: HCL signed 12 transformational deals in Q3FY20 led by IT and Business Services, in the key industry verticals of Financial Services, Life Sciences & Healthcare, Manufacturing, Retail and CPG. The company signed its first synergy deal win, leveraging the services and software division to open a new logo. The management indicated normalization of pricing environment vis-à- vis extreme price variation/discounts witnessed earlier. The Q3FY20 marked a healthy deal renewal period at the company, including successful renewals of all large-scale engagements.
We Recommend
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CMP
₹567
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Target Price
₹633
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Potential Upside
12%
* Note: Stock Investment horizon approx. 6-9 months. CMP as on 6th March, 2020.
Please refer the research report disclaimer before making an investment decision.