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Phillip Capital (India) has a NEUTRAL call on HCL Technologies with a target price of Rs 1,040.
The current market price of HCL Technologies is Rs 1,015.90.
Time period given by the brokerage is one year when HCL Technologies price can reach the defined target.
Phillip Capital's rationale-
HCLT reported strong revenue performance this quarter, slightly missing the margin expectations.
The growth however, remained lopsided – with nearly 50 per cent of the incremental revenues in the quarter contributed by Telecom segment and nearly 70 per cent by IMS (ramp-up of a large deal).
The sustainability of the same remains questionable.
While the company maintained its guidance for FY19, the guidance translates into 6-6.5 per cent CC organic growth – significantly below peers.
Over the last seven quarters, the company has seen sharp deceleration in its IMS business (excl this quarter) – we expect the same to continue over the next two years, driven by rapid pace of adoption of cloud platforms.
Its efforts to mitigate this deceleration, by converting balance sheet into PL, will not find much favors with the investors (latest being the $1.8bn acquisition from IBM in Dec-18).
We maintain our NEUTRAL view on the stock, as we see significant underperformance (relative) in near-tomedium term.
Inexpensive valuations (11x FY21) will, however, keep the downside limited.
Outlook and valuation: We have made minor changes to our FY19/20 estimates (less than 5 per cent), factoring the acquisition of IBM products.
We introduce FY21 estimates and roll forward our valuation to FY21 earnings.
We value the stock at 12x FY21 P/E (earlier 14x FY20 P/E).
We see limited upside potential from current levels – inexpensive valuations keep the downside limited.
We maintain NEUTRAL with the price target of Rs 1,040 (Rs 1,090 earlier).
