EUR 120.00 For Business Accounts Only

MOSL: HCL TECHNOLOGIES (Buy)-Services strength to cushion any Product softness

HCL TECHNOLOGIES: Services strength to cushion any Product softness; Maintain Buy

(HCLT IN, Mkt Cap USD42.1b, CMP INR1153, TP INR1430, 24% Upside, Buy)

 

• We expect the robust performance in HCL's Services business, especially the ER&D vertical, to continue as the demand environment remains favorable. We also draw comfort from improving management commentary on continued growth momentum in the IT Services business.
• Sustainable demand momentum for Cloud and Digital Engineering benefits HCLT, given its large presence within IMS and ER&D and continued investments in capabilities. Strong headcount additions and deal wins reflects the management's confidence on a sustainable growth momentum.
• We continue to see potential in HCLT's Products and Platforms business. While, the recent departure of the head of Products has elevated concerns on business recovery. However, we don't see a meaningful risk of a further hit from this event, our sensitivity analysis (Exhibit 7) suggests limited impact on EPS even in a bear case (4% decline in revenue for the Products and Platforms business in FY23E would lead to a 2.6% drag on our EPS estimate).
• On a combined basis, HCLT should deliver USD revenue growth of 13.1% over FY21-23E. We expect EBIT margin to stabilize at 20% in FY23E, which should help it deliver 14.3% PAT CAGR over FY21-23E.
• HCLT's recent revision in payout policy (at least 75% of net income, up from 50%) over FY22-26 is a positive. A higher payout reflects a strategic shift to focus on organic growth and limit inorganic investments to bolt-on and capability based acquisitions (v/s large revenue accretive acquisitions).
• We maintain our Buy rating as we expect traction in the Services business in 2HFY22E and FY23E, driven by higher IMS/Cloud-focused deals.