Buy This Large Cap IT Stock With A Target Price Of Rs. 1,600 Says Axis Securities
Shares of HCL Technologies Ltd were given a buy rating by Axis Securities, with a target price of Rs. 1,600. On the NSE, the stock was trading at a market price of Rs. 1,260.55 per share at 3:30 p.m. on January 17, and the brokerage expects the stock to reach its target price in a year. On September 24, 2021, the stock hit a 52-week high of Rs 1,377.75 and a 52-week low of Rs 891.00 on May 3, 2021, respectively. HCL Technology is a large-cap IT company with a market capitalization of Rs 362,871.30 Cr, and its stock is now trading 8.50% below its 52-week high and 41.47% above its 52 week low.
Main investment justification for HCL according to Axis Securities
- Management foresees a strong demand environment and expects the company to show encouraging growth over the next 5 years in line with industry growth. While the company expects cost-cutting deals to see near-term traction, it sees digital transformation spending as more structural.
- Synergies are currently anecdotal and management foresees significant cross-selling opportunities within both product and service customers. Keeping this in mind, management plans to invest more in sales and marketing for this business. We are optimistic that the P&P activity will help the company improve its longer-term operational efficiency. He sees strong traction in products such as HCL DX and HCL Commerce.
- Engineering and R&D services saw robust growth of 8.3% QoQ in CC (19.7% YoY in CC) thanks to traction in digital engineering and IoT works. IT & Business Services saw solid growth of 4.7% QoQ CC (15.3% YoY CC), driven by an acceleration in cloud transformation and application modernization transactions.
- Hiring continued at a steady pace with a net addition of 10,143 people during the quarter. Total headcount now stands at 197,777. HCL Tech’s Q3FY22 attrition in IT services increased 390 basis points to 15.7%. The number of employees increased by 11,135 bringing the total workforce to 1,87,634. HCL Tech also declared a dividend of Rs 10/share.
- The company continued its strong addition of customers across all categories. On a yearly basis, 50 million+ customers increased by 11, 20 million+ customers increased to 13, 10 million+ customers increased to 25, 5 million+ customers and more than 34 and 1 million customers and more than 50.
- Mode 2 business showed robust growth of 30.2%, which includes cloud transformation and IoT machine learning. Management continues to forecast favorable macroeconomic demand scenarios over the medium to long term.
- HCL plans to acquire a 100% stake in Starschema – a limited liability company incorporated in Hungary, for a total cash consideration of US$42.5 million. With this acquisition, HCL will strengthen its data engineering capabilities and solutions, which will accelerate the growth of Mode 2 services in the digital engineering and near-shore Eastern Europe markets, while increasing its ability to evolve. The transaction is expected to close by March 22. In addition, the company also announced the acquisition of a 51% stake in the German IT consulting company Gesellschaft für Banksysteme GmbH (GBS), alongside apoBank which would hold the balance at 49% of the capital. The strategic partnership would drive digital transformation and innovation for the German financial services industry. HCL paid 99,000 euros in consideration for the purchase of its 51% stake. The transaction was finalized with effect from January 5, 2022.
Buy with a target price of Rs. Rs. 1,600
The brokerage claimed in its research report that “HCL Tech has built a resilient business model by securing multiple, high-value, long-term contracts with the world’s top brands. In addition, a strong deal pipeline and a superior service mix will help the company achieve leading growth in FY22 as well as FY23. We recommend a BUY on the stock and assign a 24x P/E multiple to its FY24E earnings of Rs 67.4/share, resulting in a TP of Rs 1,600/share, indicating a 20% rise in current market price (CMP).”
The stock above was taken from the Axis Securities brokerage report. Investing in stocks presents a risk of financial loss. Investors should therefore exercise caution. Greynium Information Technologies, the author, and the brokerage are not responsible for any losses caused as a result of decisions based on the article.
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Article first published: Tuesday, January 18, 2022, 9:07 a.m. [IST]