Buy HCL Technologies Stock, Says Emkay Global, Sets Target Price Of Rs 1070

Broking firm, Emkay Global has suggested buying the stock of HCL Tech in its latest report. According to the broking firm, revenue grew 1.9% QoQ to USD3.08 bn (3.8%/15.8% QoQ/YoY CC), above our estimates, on back of continued strength in the Services business (5.3% QoQ CC). EBITM expanded ~90bps QoQ to 17.9%, clocking 60bps above our expectations.

Services business EBITM expands

Services business EBITM expanded 130bps QoQ to 17.6%, bolstered by currency movement (+60bps), SG&A leverage (+45bps), and uptick in realization & increased utilization (+115bps), partly negated by wage hikes (-90bps). Net profit stood at Rs 34.9 bn, higher than our estimate, due to better than expected operating performance. "HCL Tech delivered better-than-expected operating performance in Q2. The demand environment continues to be healthy and fairly broad-based. Management remains confident about the near-to-medium term growth outlook on the back of strong deal intake and deal pipeline. HCLT has increased its revenue growth guidance to 13.5-14.5% CC (earlier, 12-14%) for FY23, implying 2.6-3.8% CQGR in H2, on the back of continued traction in the services business, product business seasonality, healthy deal intake (USD2.38bn in Q2FY23) and strong momentum in Cloud, Digital & Engineering services," the brokerage has said.

Price target of Rs 1070 on the stock

Emkay Global has raised the price target to Rs 1070 on the stock. "Management has revised EBITM guidance to 18-19% for FY23 (earlier, 18-20%), and the strong recovery in Q2 grants it confidence on delivering within the guided range. We raise our earnings by 0.9% to 2.5% for FY23E-25E, factoring-in the Q2 performance. We maintain BUY, with a target price of Rs 1,070 per share at 17x Sep-24E EPS (earlier, Rs1,060), considering reasonable valuations and the >4% dividend yield," the brokerage has said.

Earnings-call KTAs:

Emkay has listed the earnings call KTAs, some of which include:

1) The growth momentum in services was led by digital engineering and digital application services, with cloud adoption being a horizontal theme across all services and verticals. 2) Higher billing rates/better realization, pyramid optimization, higher utilization, growth-led operating leverage, and rupee depreciation remain key margin levers. 3) Deals signed January onward are based on the revised rate cards. Management further indicated that negotiations are ongoing in existing deals and new deals are being signed with COLA clauses. 4) Management expects the P&P business to remain flattish for FY23. 5) The company hired 10k freshers in Q2 and plans to add ~30k freshers in FY23. 6) Mode 2 continues to lead the growth momentum, growing at 30.9% CC YoY in Q2.