We believe HCLT now has broad-based, diversified business model with multiple engines firing simultaneously to deliver industry leading organic growth in FY20E. We believe a limited understanding of the financial impact of 7 software products acquired from IBM was one of the factors for HCLT underperformances over its peers in past, with the clarity of treatment & strong broad-based organic growth with sustained margin performance makes stock extremely attractive and worth an investment at inexpensive 12X FY21E earnings. We expect USD revenue CAGR of ~12.1% over FY19-21E with earnings CAGR of ~8.4%. we maintain our Buy rating (GARP - growth at reasonable price) valuing HCLT at 14X FY21E earnings (30% discount to Infosys, 60% discount to TCS target multiple) & arrive at a TP of Rs. 1210. Stock is currently trading at 13x FY20E EPS and 12X FY21E EPS. Our EPS estimates stands for FY20E/FY21E stands at Rs 77.2/ Rs 86.4.
Maintain Buy: HCL Tech is expected to deliver strong organic growth among large peers in FY2020E, led by robust organic growth (14% y-o-y CC) in Q1FY2020, large addressable opportunity in IMS, and strong growth in the ERS business. Further, investments in digital technology would help the company build digital competencies, which would provide a sustainable growth momentum going forward. However, we believe aggressive capital allocation towards the product business remains a risk to its business model and the integration of recent acquisitions remain a primary focus area. At the CMP, the stock trades at 14x/13x its FY2020E/FY2021E earnings estimates, which look attractive and is at a discount to peers despite better revenue growth. We maintain our Buy rating on the stock with an unchanged PT of Rs. 1,250.
We have corrected our volume estimates for FY20 and now expect a revenue CAGR of 1%over FY19-21E (earlier 12%) and PAT CAGR of -6% FY19-21E (earlier 11%). We have also cut down our P/E multiple for AAL to 13XFY21E (5 year forward mean -1 STD is 12.4X) to arrive at a target price of Rs 931. We recommend a BUY rating and advise investors to BUY in a staggered manner for better entry price in current market volatility.
While we are positive about revival in HCLT’s organic growth from a low of 5%to a guidance of around 7-9% on the back of large deals won in the recent past, delay in revival of IMS and ER&D businesses would be a drag. However, we believe impending pressure on margins and concerns on ability of the company to generate revenues from newly acquired IPs from IBM, would keep a check on the stock. Also, given the fact that it has outperformed broader IT index in the recent past, we recommend a “HOLD” on the stock with a target price of Rs.1243, anupside potential of 13%. We value HCLT at 1SD of 3-Yr historical average FY21EPE of 14.1x.
Healthy deal wins, higher growth in key business verticals will put HCL Tech on high growth trajectory. We assign 13.8x P/E multiple to its FY21E earnings of Rs. 89.5 per share which gives a target price of Rs. 1,235 per share, an upside of 15%.
Acceleration in revenue in FY20 is based on its strengths in implementation of hybrid cloud, its automation skillsets, IoT and core engineering capabilities to execute integrated full-stack deals. HCLT’s commentary seems cautiously optimistic and against the 2H driven growth indicated a quarter back, the company is not building in a strong 2H, a source of comfort. The big kicker in FY20 will be incremental IP-related revenue from the deal signed with IBM. Post 1QFY20 results, we reiterate our Accumulate rating on HCLT with a March 2020E target price (TP) of Rs1,127.
Organic growth to remain strong, maintain Buy: We havefine-tuned our earnings estimates for FY2020E/FY2021E, factoring in miss in operating profitability and higher tax provision. Ramp-up of largedeals won earlier and healthy deal pipeline along with large addressable opportunity in IMS provides visibility of acceleration in organic revenue in FY2020E. However, we also acknowledge aggressive capital allocation towards the product business remains a risk to the company’s business model. At the CMP, the stock trades at 13x/12x its FY2020/FY2021 earnings estimates, which look attractive considering better revenue growth versus peers over FY2019-FY2021E. We maintain our Buy rating on the stock with an unchanged PT of Rs. 1,250.
We believe strong deal wins in earlier years coupled with healthy outlook for BFSI & IMS will help HCLT to achieve higher end of organic guidance. We believe HCLT is focusing on broad-based growth (e.g megadeal in BPO segment, investing in digital competencies) will reduced its dependence on IMS growth. We believe management is conservative on revenue guidance on account of weak & volatile external environment & have enough cushion to meet any potential slowdown in spending. HCLT has the potential to achieve the industry leading organic growth in FY20E. HCLT is trading at inexpensive valuations of ~11.8x FY21E valuations, we maintain our Buy rating (GARP- growth at reasonable price) valuing HCLT at 14X FY21E earnings (30% discount to Infosys, 60% discount to TCS target multiple) & arrive at a changed TP of Rs. 1210. Stock is currently trading at 13.2x FY20E EPS and 11.8x FY21E EPS.
Near-term 1QFY20 performance will remain subdued as mentioned above, while the company takes on further balance sheet risk in an attempt to boost growth. At this point, valuation support remains the only positive aspect for the stock. We maintain our BUY rating on HCLT with a revised TP of Rs1,280 (Rs1,195) as we roll over to FY21, even as we expect the stock to move southward in the near-term given the above- mentioned issues.