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Motilal Oswal
HCL Technologies (Buy)
CMP: ₹582.95
Target: ₹700
HCL Technologies is engaged in providing a range of software development services, business process outsourcing services and information technology (IT) infrastructure services. The company’s segments include software services, infrastructure management services and business process outsourcing services.
Repatriation of workloads from public cloud to on-premise/hybrid cloud is likely to be a key emerging horizontal theme. Higher IMS exposure and stronger hybrid cloud capabilities make HCL Technologies the biggest beneficiary. We expect up to about 5 pp organic growth outperformance versus top 2 over FY21-22. Changes in the organisation structure/GTM are showing early signs of success.
We find comfort with: a) HCL Technologies’ ability to build a completely independent sales team for products; b) No further merger and acquisition plans in Mode-3 in near term.
Our conservative estimates (CAGR: -5 per cent, OPM: 21 per cent) on Mode-3 adequately capture our continued pessimism. Historically, valuations have shown strong correlation with organic growth, except for the recent cycle.
Our target price of ₹700 is arrived at using DCF based SOTP. This implies a marginal re-rating to 14x driven by further organic growth acceleration and concerns around Mode-3 receding. Upgrade to ‘Buy’.
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