The three takeaways are reinstatement of guidance at 1.5–2.5% CQGR for the remaining quarters of FY21E implies 1–2% decline for the year.
HCL Technologies (HCLT) reported a 7.2% QoQ decline in revenue for Q1FY21 versus our estimate of a 6% QoQ drop, but positively surprised on EBTIDA margin, turning in 20.5% versus our estimate of 20.2%.
The three takeaways are reinstatement of guidance at 1.5–2.5% CQGR for the remaining quarters of FY21E implies 1–2% decline for the year. A 40% QoQ jump in order pipeline. Strong margin guidance of 19.5–20.5% for FY21. Overall guidance implies single-digit revenue (INR) as well as EPS growth in a pandemic-ravaged FY21. We believe cloud adoption, digital and core transformation are the key drivers of the tech upcycle in the wake of the explosion of online activity. The tech upcycle’s benefits would be back-ended, showing up FY22 onwards. Hence, it is fair to raise the target multiple from 16x to 18x in line with our view on the IT services sector. The stock is attractive at 11.8 FY22E EPS. Maintain ‘BUY’ with a revised TP of INR952 (18x FY22E EPS; INR846 earlier at 16x FY22E).
HCLT reported a QoQ revenue decline of 7.2% led by a sharp dip of 9.5/4.7% in Mode 1/3 business while Mode 2 (digital) was down just 1.6%. Performance by segment is in line with other companies’ results, with HCL Tech also suffering a drop of 9% in ER&D, which has a high correlation with covid-19 and the current lockdown. We believe management commentary of a 40% QoQ jump in the deal pipeline is quite encouraging.
The company reported a robust margin of 20.5% versus our estimate of 20.3%, in spite of the covid-19-induced disruption. Moreover, management gave a margin guidance of 19.5–20.5% for FY21, which is encouraging and implies PAT growth even in a pandemic-ravaged year.
HCLT’s guidance of a strong recovery in revenue growth along with stable margins and a healthy deal pipeline prompts us to raise its target multiple from 16x to 18x as we believe IT services is at the bottom of the imminent tech upcycle led by cloud adoption, digital and core transformation leading to tremendous pressure on local resources and pushing outsourcing. Retain ‘BUY/SP’ with a revised TP of INR952 (versus earlier TP of INR846 at 16x FY22E).