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IndiaNivesh
HCL Technologies (Buy)
CMP: ₹583.3
Target: ₹700
HCL Technologies (HCLT) reported a solid performance in Q3FY20, with CC revenue up 2.1 per cent q-o-q and dollar revenue up 2.3 per cent q-o-q (up 16.4 per cent y-o-y in CC terms and >15 per cent y-o-y in dollar terms) to $2,543 million. This was aided by the products and platforms (P&P) business, which saw over 15 per cent q-o-q growth in dollar terms, aided by seasonality and integration with HCL Software, which enabled better revenue recognition as against deferred revenue earlier.
Strong P&P growth aided margin expansion of 29 bps q-o-q to 20.2 per cent, above its margin band. However, the management believes this may not be a trend, as is reflected in the company’s EBIT margin band, which while having been raised to 19–19.5 per cent (18.5–19.5 per cent earlier) is still well below the Q3 margin.
We are enthused by the IT major’s impressive performance and outlook, even as we expect FY21 revenue growth to moderate, but still hit double digits. Industry-leading growth, strong margin performance, decent growth outlook and reasonable valuation at 13.7x/12.3x FY21E/FY22E EPS leads us to initiate coverage on HCL Technologies with a ‘buy’ rating and target price of ₹700, implying a PE of 16x FY21E EPS.
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