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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


IBM partnership – driving growth and earnings momentum: HCL Tech has completed the acquisition of 7 products from IBM out of which 5 products were earlier under IP partnership and 2 products are new. Company has already paid $ 81 crs on June 30, 2019, and will likely pay $ 81.25 Crs after one year. The deal also has an earnout component of $ 15 crs to be paid in three installments. This partnership will lead to goodwill of $ 92 crs and intangible asset of $ 125 crs adding to amortization. IBM product portfolio has EBITDA margin of 50%+ with amortization of ~20%, yielding EBIT margin of ~30%.

Quarterly performance: HCL Tech reported strong Q1FY20 numbers. The numbers are much in line with expectations. The revenue in constant currency grew 2.7%.QoQ and 18.4% on YoY basis at Rs. 16,425 crs. However Net income was down by 13.6% QoQ at Rs. 2,220 crs. The mode 1 business vertical grew by 4.1% QoQ, Mode 2 business vertical grew by 3.6% QoQ. Mode 3 business grew by 6.5% QoQ.

Strong guidance for FY20: The company has given strong revenue growth guidance 14%-16% for FY20 backed by strong deal wins. It maintained FY20 operating margin guidance of 18.5-19.5% citing investments in the digital business. Management commentary on deal wins was positive with 12 transformational deals linked during the quarter. During the quarter the company added 2 clients in 100mn+ vertical, 6 clients in 10mn+ vertical, 10 clients under 5mn + bucket, 10 clients under 1mn + bucket.

We reiterate BUY on HCL Technologies India with a target price of Rs. 1,235.



WE RECOMMEND


  • CMP

    Rs.1,100

  • Target Price

    Rs.1,235

  • Potential Upside

    12%


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

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