HCL Tech: Buy, sell or hold after Q4 results?

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IT services major HCL Technologies on April 23 reported that its consolidated net profit fell by 24.3% on a year-on-year basis to Rs 2,387 crore for the quarter ended March 2021 compared to Rs 3,154 crore earned in the same quarter last year. The company took a hit of Rs 575 crore as it declared a one-time bonus for crossing the $10 billion milestone. Sequentially net profit was down 40.1%.

Consolidated revenue from operations rose 5.7%1 to Rs 19,642 crore as against Rs 18,590 crore a year ago. On a sequential basis, topline grew at 1.8%.

The company registered its highest ever new deal booking this quarter of US $ 3.1 billion with an all-time high exit pipeline.

While the company has reported a muted Q4 numbers, analysts have downgraded the stock.

Here’s what they have to say:

Sharekhan | Target Price: Rs 1,200 | Upside: 25%

Tweaked earnings estimate for FY2022E/FY2023E, to factor in the lag in headline estimates, lower-than-expected EBIT margin guidance, the retirement of a couple of products and strong deal win. However, the strong deal bookings, a healthy deal pipeline, strong net employee addition and rising spends on transformation initiatives by clients would help HCL Tech deliver strong revenue growth in FY2022E. With improving free cash flow (FCF) generation, expect that the management would maintain a higher payout ratio in coming quarters. At CMP, the stock trades at a reasonable valuation of 19x/17x its FY2022E/FY2023E earnings

Motilal Oswal | Target Price: Rs 1,190 | Upside: 25%

Downgrade FY22E/FY23E EPS estimate by 8.5%/7%, led by a PAT miss during 4QFY21. We factor in lower growth in the Products and Platforms business and higher sales and marketing investments in FY22E.

Kotak Institutional Equities | Target Price: Rs 1,080 | Upside: 11%

Cut FY2022-24E EPS primarily on higher tax rate assumption. Our operational assumptions are largely unchanged. We were lower than the consensus on profitability assumptions. HCLT’s IT services business profile has improved courtesy better digital and application competencies, evidenced in consistent integrated deal wins that spell sustainable growth. Strong deal wins and a record-high pipeline provide a solid foundation to FY2022E revenue growth.

Dolat Capital | Target Price: Rs 1,140 | Upside: 19%

Considering its growth guidance and TCV data we have largely retained our revenue growth estimates that factors in 12.4%/9.4% growth in Revenue for FY22/23E respectively. However, given its modest performance on profitability in Q4 and wide OPM band guidance of 19-21%, have curtailed our OPM estimates by 70/17bps for FY22/23E building in OPM of 20.2%/20.6% respectively. Thus, on an overall basis resulting in earnings cut of about 3.5% for FY22.

Antique Stock Broking | Target Price: Rs 1.300 | Upside: 36%

HCL Tech achieved more than 10% YoY organic constant currency growth which is highest among large cap peers but expect HCL growth to lag larger peers TCS/Infosys in medium to long term. Value HCL Tech at multiple of 22x FY23e EPS which is at 30% discount to our valuation multiple of Infosys adjusting for lower long-term growth rate and lower RoEs. Valuation multiple also discounts on lower growth expectations as we are forecasting lower growth in FY22/23e versus larger peers, lower ROEs and pay-out yield.

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