Margin guidance raised; firm on cusp of an upcycle led by cloud and digital change; maintain ‘Buy’
IMS (12% of business) had powered HCLT’s 16% revenue CAGR during the FY09-16 phase, lifting its market cap 14.5x.
HCL Tech (HCLT) reported a solid set of Q2FY21 numbers. While revenue increased 6.4% to $2,507 mn, higher than our $2,504 mn estimate, margin expanded 110bps q-o-q to 21.6% versus our 21.3% estimate. Management maintained q-o-q revenue guidance of 1.5-2.5% keeping seasonality and second wave of pandemic risks in mind; it raised margin guidance to 20-21%.
IMS (12% of business) had powered HCLT’s 16% revenue CAGR during the FY09-16 phase, lifting its market cap 14.5x. We believe we are on cusp of another such upcycle spearheaded by cloud and digital transformation with much higher contribution of ~50% to overall business. Maintain Buy with TP of Rs 1,481.
Firing on all cylinders: Revenue of all verticals, excluding manufacturing, grew in cc. Lifesciences & healthcare, retail & CPG and technology & services were the strongest verticals growing 8.6%, 8.4% and 6.3% q-o-q, respectively (in cc). Revenue grew across all geographies as well. HCLT also inked 15 transformational clients led by key industrial verticals . Mode-2 (digital) was again the best performer growing 6.9% q-o-q (in cc). Mode-1 (digital foundation) and Mode-3 (IP led) also recovered, growing 4.3% and 2.1% q-o-q, respectively.
Poised to take-off in the upcycle: The pandemic has catapulted technology spends in the new technology space, while traditional remains flattish to slight decline. We continue to believe we are in an upcycle and it will accelerate growth to mid-teens for long (FY23-27e) and also a higher EPS (22-25%) CAGR.
Outlook: Upcycle play—Strong growth momentum in digital transformation & cloud business and stability in products & platform segment further reaffirm our conviction in HCLT. The stock trades at 16.3x FY22e. We retain ‘BUY/SO’.