HCL Technologies Ltd.: Analysts see up to 80% upside in HCL Tech after Q2 show

NEW DELHI: Dalal Street analysts gave thumbs up to the September quarter numbers of HCL Technology and expect shares to deliver robust gains in the months to come. Comparatively, the growth in numbers were better than its peers, except Infosys.

The IT major on Friday posted an 18.5 per cent year-on-year (YoY) rise in net profit at Rs 3,142 crore while the topline rose 6.1 per cent YoY to Rs 18,594 crore. The stellar set of numbers were expected as the company had given indication in September itself, setting off a rally in shares.

“HCL Tech delivered a robust set of numbers, higher than our and Street estimates. Deal pipeline is at an all-time high. These numbers reinforce our belief that we are in the beginning of a tech upcycle. Overall performance was broad based with all growth engines firing,” said Sandip Agarwal, an analyst at Edelweiss Research.

He has a 12-month target of Rs 1,481 on the scrip, meaning a nearly 80 per cent potential upside from the current market price.

Operating cash flow and free cash flow came in at $643 million and $578 million respectively for the quarter. The company has maintained its revenue guidance for the next two quarters. Revenue is expected to increase 1.5-2.5 per cent sequentially in constant currency terms. The management also raised its margin guidance from 19.5-20.5 per cent to 20-21 per cent.

Despite the encouraging commentary, HCL Tech’s shares fell over 3 per cent to Rs 830-level during Friday’s trade, but analysts brushed it off as a sell-on-news scenario and advised to focus on long-term growth. HCL Tech shares are up 46 per cent year-to-date and over 5 per cent since it released a Q2 performance report in September, exactly a month ago.

This is still a reasonably valued stock trading around 16 times two-year forward earnings; so it is almost at a 35 per cent discount to TCS. From a full-year perspective, it could grow revenues by 1-2 per cent; so that way with the kind of valuations it commands, we actually have a target of around Rs 930,” said Madhu Babu, analyst at Centrum Broking.

However, he warned that margins for IT firms, including HCL Technologies, may taper off next year as clients will ask for a discount.

“All companies are showing good margin beats because of the work from home-led cost savings as well as higher offshore shifts. Gradually next year, you might see the clients asking for some discount because initially, in the first six or seven months, you will enjoy the benefits of all these short-term gains, but gradually that gets passed on to clients. So that also can lead to some tapering off on the pricing next year,” Babu said.

Pankaj Pandey, Head Research at ICICIdirect also said the company beat his expectations. “I think this company is a good play on cloud business and is trading at 18-19 times, similar to what we are seeing in Wipro. Compared to Wipro, this is expected to deliver far better growth. So my sense is that within tier-1, this is also expected to keep doing well,” he said.

Until now, TCS, Infosys, Wipro and Cyient had all delivered a strong set of results ahead of expectations while Mindtree results were slightly muted on the revenue front, noted Edelweiss.

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