HCL Technologies share price today is Rs 967, up Rs 17 or 1.8%. HCL Tech market cap is Rs 2.6 lk cr. The 52 week high on HCL Technologies is Rs 1067 and 52 week low is Rs 545. The Nifty IT Index is up 1.5% today. Even Tech Mahindra is on the top gainer list on Nifty today. 

COMMERCIAL BREAK
SCROLL TO CONTINUE READING

Nomura says Q4 results missed expectations as revenues stood at 3% qoq in Constant Currency terms (vs 3.4%) due to weaker than-expected seasonality in the products business. Also the EBIT margins came at 20.4% (below expectations of 21.4%), due to increased hiring and other reasons. However, as far as Order Book is concerned, net new deal wins of USD 3.1bn (implying a book-to-bill of 1.2x) in 4Q was impressive, with a healthy mix of mid and large sized deals. Nomura says Buy with a price target of Rs 1110.

Further, FY22 guidance was broadly in line with:

1) revenue guidance of at-least double-digit growth (vs expectation of 9-11%); Nomura thinks HCL Tech is likely to beat it led by strong deal wins in 4Q and an easy ask rate of 2% CQGR in FY22F
2) EBIT margin guidance of 19-21% (vs expectation of 20-21%), but excluding the impact of incremental investments, the guidance was broadly in line

HCL Tech management talked about incremental investments (100bp impact) in building capabilities in Mode 2 services, expanding geographic presence and investing in talent. Nomura expects 11.2% USD revenue CAGR over FY21-23F and stable EBIT margins at 20% for F22/23F.

Nomura reiterates Buy rating, due to following reasons:

1)      improved capabilities in digital foundation areas, visible in strong TCV
2)      better portfolio skew towards IMS/ER&D, highly under penetrated areas coupled with cost take-out opportunities
3)      focus on investments in Mode 2& geo expansion and synergies from the products business,
4)       attractive valuation at 19x FY22F EPS (25-40% discount to Infosys / TCS)

Positives on HCL Tech:

1)      HCL Technologies announced an increase in the quarterly dividend to Rs 6/share (50% payout) and a special dividend of Rs 10/share
2)      IT & Business services, BFSI/ Healthcare and Mode 2 led growth
3)       4Q net new TCV of USD3.1bn was up 49% yoy and FY21 net new TCV of USD7.3bn, up 18% y-y.

Negatives of HCL Tech:

1)      sharp 950bp q-q drop in EBIT margins in the Mode 3 business
2)      increase in ETR to 24-25% going forward on inability to claim tax benefit on goodwill depreciation effective 1 April 2020.

Nomura fine-tuned their revenue estimates, however cut their EBIT margin estimates by 40- 100bps for FY22/23F led by miss in 4Q and increased investments. As a result EPS is lower by 5-8% for FY22F/23F. Nomura now looks for USD revenue/EPS CAGR of 11% and 9%, respectively, over FY21-23F. Nomura continues to value HCL Tech at 19x (25%+ discount to target multiple for Infosys / TCS) 1-year forward EPS.

Downside risks on HCL Technologies:

Inability to add capabilities in digital, acquisitions in legacy areas and weaker-than-expected margins