HCL Technologies Ltd. share price target

HCL Tech (HCLT) reported an above-expected operating performance in Q3FY20, supported by a modest beat on both revenue and margins.

18 January 2020 Seasonality in the Services business translated into tepid growth. Despite positive seasonality, the Products business reported a slight decline on an organic basis. Order booking during the quarter witnessed a dip. However, outlook on both growth and margins remained stable. We upgrade our EPS estimates over FY20-22 by 1-4% as we adjust our currency and ETR assumptions. As highlighted in our HCLT to be the key beneficiary of public cloud repatriation given its higher IMS exposure and stronger hybrid cloud capabilities. Reiterate Revenue growth for 3QFY20 stood at 16.5% YoY CC, EBIT grew by 18.9% YoY, while PAT grew by 16.4% YoY. Organic revenue growth was 0.7% QoQ (CC), slightly lower than our expectation of 0.8%. Incremental inorganic contribution (v/s 2QFY20) from acquired IBM products was ~USD41m (below est.

Our analysis suggests that the uncertainty around policy/tech spends will be more pronounced in verticals like BFSI, Hi- Tech/ISV and Healthcare over the next year. For most of FY16-19, as workloads increasingly moved from on-premise to public cloud, HCLT witnessed deflationary headwinds in IMS, leading to subdued organic growth. However, our analysis suggests that growth will improve further due to the recent increase in uptake of traditional, non-cloud- enabled data centers. Recent CIO surveys by industry analysts (e.g. IDC) conclude that on an average ~50% of public cloud applications (or 5+ apps) will be repatriated. HCLT has been consistently rated as a leader by industry analysts (IDC/Gartner) in hybrid managed infrastructure, DC outsourcing, managed cloud services, etc. As clients rebalance workloads from public cloud to on-premise and eventually to hybrid cloud, HCLT will emerge as the key beneficiary, in our view.

HCL Tech made an announcement on bonus shares along with its Q2FY20 results on October 23, 2019. The ratio was one bonus share for every existing equity share held i.e. 1:1. The record date for the same is December 7, 2019 while the ex-date for the same is today i.e. December 5, 2019. Consequently, HCLT's share price, as per yesterday's closing price, has dropped to | 563/share from | 1126/share. Currently, the stock is trading at | 563/share. Our target price also stands revised to | 600/share from...

HCLT outlined its strategic framework comprising five focus areas: 1) Mode 1-2-3 strategy to sustain core growth and focus on new areas for accelerated growth, 2) mix of services and products to capture diversified client spend, 3) balanced organic and inorganic investments for accelerated growth, 4) opportunities from collaboration with partners and customers such as Microsoft, IBM, Google cloud, Salesforce and 5) cost management built around automation. Over the last three years, the three mode strategy has helped the company progress on digital business (mode 2) and products &...

HCLT is unlikely to do any large product acquisitions in near-to-medium term & they want to focus on the existing acquired products & establish credentials in the market. HCLT management expects double digit IRR (12-15% base...

At analyst meetings hosted separately by INFO and HCLT, we noted evolving digital capabilities and growing digital contract sizes at both players.

At its analyst day, HCLT reiterated its guidance of acceleration in organic growth for FY20 and mentioned its target to sustain superior organic growth. This target includes driving higher growth in Mode 2 and 3 solutions which remains a key lever for...

Over FY17-19, HCL delivered a CAGR of 12% (in CC) in revenue, 14.2% in EBITDA, 17% in cash EPS (i.e. OCF before CWC) and 8% in normal EPS. The company guided for revenue growth of 15-17% YoY CC and EBIT margin of...

Retail & CPG 10% (up from 9.5% in Q1) and Telecommunications, Media, Publishing & onboarding more than 1300 partners, and completing over 1500 total sales transactions comprising both renewals and new licenses, in more than 50 countries. The HCL Software business also announced its first major new product release of HCL Digital Experience 9.5, incorporating several core HCL Software architectural priorities around containerization,...