Analysts lauded HCL Technologies Ltd.’s growth in products & platforms business, increasing exposure in engineering and R&D, and reasonable valuations, among others, as they hiked price targets for the software services provider after the third quarter.
The company’s revenue rose 3.8% over the preceding three months to Rs 19,302 crore in the October-December, according to an exchange filing. Its EBIT margin expanded to 22.22% from 21.59% despite wage hikes. Net and operating income, too, increased during the period.
HCL Tech even raised its revenue guidance to 2-3% for the quarter ending March from 1.5%-2.5% growth forecast earlier. It expects EBIT margin for FY21 to be in the range of 21-21.5% against 20-21% predicted earlier.
While analysts see the company’s guidance as disappointing, they maintained their bullish investment recommendation on the stock. Of the 47 analysts tracking HCL Technologies, 42 have a ‘buy’ rating, four suggest a ‘hold’ and one recommends a ‘sell’.
Shares of HCL Technologies are trading little changed in Monday's trading session. Based on the 12-month Bloomberg consensus data, the stock has a return potential of 13%.
Here’s what analysts have to say about HCL Tech’s Q3 results...
Jefferies
- Maintains ‘buy’ rating; raises price target to Rs 1,200 apiece from Rs 1,160.
- Products and platform business growth and margin expansion were key positives.
- Margin guidance for Q4, continued weakness in engineering and R&D services was disappointing.
- Demand environment remains strong.
- Raises estimates by up to 9% to factor in the beat.
- Sees 10% revenue and EPS CAGR over FY21-23.
- Continues to offer , given that it trades at a 25-40% discount to TCS and Infosys while offering similar growth.
Ambit Capital
- Maintains ‘buy’ rating; hikes price target to Rs 1,140 from Rs 1,040 apiece.
- High skew towards IMS, which gains from cloud, cybersecurity, networks and Work from Home enablement demand.
- Strong presence in engineering and R&D which is showing robust underlying momentum.
- Positive growth surprises in products business, which is highly cash generative and margin accretive.
- Raises EBIT margin estimates by 60-70 basis points given robust margin performance in Q3.
- Sees U.S. dollar revenue, EPS CAGR of 7.7% and 13.7%, respectively, over FY20-23.
- Reiterates top pick status
Motilal Oswal
- Maintains ‘buy’ rating; raises price target to Rs 1,300 apiece from Rs 1,140.
- Views the improvement in deal wins, robust deal pipeline and large engineering and R&D exposure as a positive.
- Will continue to benefit from high demand for cloud migration work.
- While wage hike and sales investments are margin headwinds for FY22, it should also benefit from growth-led positive operating leverage.
- Expects Q4 revenue growth and FY21 EBIT margin at the upper end of the guidance band.
- Preferred pick in the IT services space.
Emkay
- Maintains ‘buy’ rating; hikes price target to Rs 1,130 apiece from Rs 1,090.
- Strong revenue performance led by mode 2 and mode 3.
- EBIT margin expansion, solid performance of products and platform business and healthy cash generation a positive.
- Lower than expected Q4 guidance, muted growth in BFSI disappointing.
- Raises FY21, FY22 and FY23E EPS estimates of 8.4%, 4.5% and 4.1%, respectively, on solid Q3 performance, better margins and uptick in demand.
Investec
- Maintains ‘buy’ rating; hikes price target to Rs 1,072 apiece from Rs 885.
- Improving products business positive for valuations.
- Big positive and consolation to long-term worries of investors around the products and platforms business was the $30-million QoQ increase in revenue.
- Raises FY21, FY22 and FY23E EPS estimates by 9.1%, 7.2% and 4.8%, respectively.
- Believes that valuation discount to Infosys should reduce.
- Continued growth in the IMS business should help reduce the discount further.
Kotak Institutional Equities
- Maintains ‘buy’ rating; raises price target to Rs 1,120 apiece from Rs 1,040.
- Good quarter with strong growth in products and platforms business.
- Deal activity steady but could be better.
- Growth guidance for March quarter is modest.
- Raises revenue estimates by 3-7% post resilience in products business.
- Raises EPS estimates by 5-8% for F21-24.
- Solid play on cloud shift, improved digital play and growth runway in engineering and R&D opportunity
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