 "People walk in front of the HCL Technologies Ltd office at Noida, on the outskirts of New Delhi")
People walk in front of the HCL Technologies Ltd office at Noida, on the outskirts of New Delhi
Nuvama on HCLTech: Nuvama, a domestic brokerage, has raised its target price for IT giant HCLTech to Rs 2,020 per share from Rs 1,800, reflecting a 15.5 per cent upside. The brokerage, however, has maintained a ‘Buy’ rating on the scrip.
“HCLTech’s sharp re-rating has been driven by higher growth than peers and rectification of its capital allocation policy — fundamentals that we believe shall sustain in FY25 too. We are upgrading target valuation to 27x September-26 PE (earlier 24x) on better growth visibility; maintain ‘Buy’ with a target price of Rs 2,020 (earlier Rs 1,800),” Vibhor Singhal, Nikhil Choudhary, Yukti Khemani of Nuvama said in a note.
Triggers behind target price update:
Management identifies several key growth opportunities
Data and AI are projected to grow at a 19.1 per cent compound annual growth rate (CAGR) through 2029, while enterprise business applications are expected to expand at a 14.3 per cent CAGR by 2027, Nuvama mentioned in a note. Meanwhile, tech workloads are anticipated to see a 70 per cent migration to the cloud by 2028. The ER&D market is forecasted to reach $170 billion by 2027, and the business process services market is expected to hit $300 billion by 2028. The BFSI and TMT sectors are anticipated to grow at or above market rates until 2028, analysts highlighted.
In addition, the company’s management anticipates double-digit growth for the industry over the next five years, including for HCLTech.
Growth drivers
Full-stack AI solutions, enabled by AI Force and AI Foundry, analysts believe, are key. Cloud modernisation is strengthening infrastructure leadership, while vertical digital engineering in telecom, semiconductors, and automotive sectors is gaining traction. Additionally, there is a rising demand in the financial services sector, analysts added.
Gen AI boost
In terms of Generative AI, management plans to train around 50,000 employees. Initial investments are focused on infrastructure, with benefits expected to be modest in the short term for the IT services industry. However, enterprises, analysts said, are likely to invest in data management and migration to prepare for Generative AI.
Deal wins
Currently, bookings are slightly below the management’s target range of $2.3 billion to $2.5 billion, attributed to limited engagement with G2000 clients. Management plans to increase client penetration to address this shortfall. In Q1FY25, TCV (new deal wins) stood at $1,960 million.
Additionally, Project Ascend aims to drive growth through several strategies like Generative AI-led delivery transformation, increased deployment of fresh talent once growth resumes, improved productivity and utilisation, exploring new opportunities in India, optimising general and administrative expenses with Generative AI, leveraging AI-driven automation and solution acceleration, and expanding the global delivery model.
Last but not the least, for HCLSoftware, analysts believe, the focus includes increasing software business growth from low-single digits to mid-single digits, expanding into markets in India, Africa, and the Middle East, enhancing capabilities with acquisitions such as Zeenea, and continuing to leverage synergy sales.
Q1FY25Financial performance
HCL Technologies reported a revenue of Rs 28,057 crores for Q1FY25, marking a 1.6 per cent decline quarter-over-quarter (Q-o-Q) but a 6.7 per cent increase year-over-year (Y-o-Y). In constant currency terms, revenue also decreased by 1.6 per cent Q-o-Q but grew by 5.6 per cent Y-o-Y. When converted to USD, the revenue stood at $3,364 million, down 1.9 per cent Q-o-Q but up 5.1 per cent Y-o-Y.
HCLSoftware showed a positive performance with a 3.5 per cent Y-o-Y increase in revenue on a constant currency basis.
Earnings before interest and taxes (EBIT) amounted to Rs 4,795 crore, representing 17.1 per cent of the revenue. This figure reflects a 4.4 per cent decrease in Q-o-Q but a 7.5 per cent increase Y-o-Y. Net income for the quarter was ₹4,257 crores, accounting for 15.2 per cent of the revenue, which is a 6.8 per cent increase Q-o-Q and a 20.4 per cent rise Y-o-Y.
Workforce Update
The total workforce at HCL Tech was 219,401, reflecting a net addition of 8,080 employees in Q1FY25. The increase was partially offset by a reduction of 7,398 employees due to divestitures. Meanwhile, the company hired 1,078 freshers during the quarter.
Additionally, the annualised attrition rate stood at 12.8 per cent, down from 16.3 per cent in the same quarter of the previous year.
On the bourses, HCLTech stock settled 1.94 per cent higher at Rs 1,752 per share on Thursday, August 29, 2024. In comapriosn, BSE Sensex was trading 0.43 per cent higher at 82,134.61 levels.
First Published: Aug 30 2024 | 8:45 AM IST
