HDFC Securities has a buy call on HCL Technologies with a target price of Rs 1,255.The current market price of HCL Technologies is Rs 945.10.Time period given by brokerage is one year when HCL Technologies price can reach defined target.
Investment rationale by brokerage:We recently hosted HCL Techs (HCLT) CFO for investor meetings.
The discussions covered organic business and Mode-3 strategy.
HCLT has underperformed peers nearly 30 per cent over last two years on (1) Organic growth slowdown, with IMS slowing from 9 per cent to 4 per cent YoY, and (2) Balance sheet-heavy capital allocation strategy.
HCLTs rev/PAT/OCF share in tier-1 IT has been steady at nearly 15 per cent.
However, high investment intensity (USD 1.7bn ex-IBM products in acquisitions and IPP) relative to peers (35 per cent capex share of tier-1 IT) has led to a disproportionate increase in balance sheet size.
HCLTs transition from a low capital-intensity services business to an asset-heavy, IP-led model has hit FCF generation (8 per cent share of tier-1 IT).
It has also slowed down core RoCE from 35 per cent to 28 per cent over FY17-19.
HCLTs latest product acquisition is a bold move into uncharted territory (both scale and nature).
While integration and cross-sell hold challenge and opportunity here, organic business is also set to benefit from ramp up of large deal wins.
If both engines fire, a re-rating is likely, though investors will wait for sustained evidence.
We maintain faith in HCLT based on (1) Organic business recovery, supported by ramp-up of large deal wins, (2) ERD/IMS pedigree (strong growth in gt;USD 50mn client bucket), (3) Strong option value in synergies from product acquisition cross-sell, market opportunity.
Maintain BUY.
Our target price is Rs 1,255 at 14x Dec-20E EPS (in-line with 5-yr avg multiple).