HCL Tech has fallen some 17 per cent off its September high as the IT firm failed to meet Street expectations in Q2, leading to weakness in the counter.
That said, with the stock now trading at a 30-45 per cent valuation discount to its peers, some brokerages say the stock could be a good buying opportunity.
Antique Stock Broking said HCL’s underperformance against large-cap peers after Q2 results was due to the IT firm’s reporting below-average growth, largely impacted by a fall in the product & platforms business (P&P). In addition, the exit of Darren Oberst, head of HCL Tech software business — which includes IBM products and accounts for about 12 per cent of the company’s revenue — has increased the uncertainty further around the P&P business.
While there was a risk of write-offs in the products business, strong growth in core business (ER&D and IT services) should more than offset growth concerns in the P&P segment, Antique said. “We expect HCL Tech core business to grow in line with Infosys and Wipro. HCL Tech is now trading at forward PE valuation of 20 times for FY23, which is at 30 per cent discount to top 4 players. We believe the growth of HCL should improve from Q3 onwards and a strong exit rate in FY22 will support decent growth in FY23 as well,” the brokerage added.
Kotak Institutional Equities has upgraded HCL Tech to buy from add on the back of a solid outlook on growth in services and attractive valuations. It forecast double-digit services growth rate over the next three years, driven by underpenetrated ERD opportunity, integrated deals in IT services and improving strength in digital.
“Products and platforms will be a drag but it has already been baked into our estimates. Margins have troughed in the most recent quarter and will improve. A good capital allocation policy of payout of 75 per cent of net income is welcome and will aid in boosting ROIC and dim the lure of outsized acquisitions,” it said.
Emkay Global has a target of Rs 1,420 on the stock. HCL has seen consensus earnings cut in the last six months against upgrades seen by Wipro and Tech Mahindra, it said.
On an EV/ Ebitda basis, the stock trades at 35-40 per cent discounts to peers, Kotak said.
Motilal Oswal Securities said in a recent note the recent departure of the head of products has elevated concerns on business recovery, but its sensitivity analysis has suggested limited impact on EPS even in a bear case — a 4 per cent decline in revenue for the P&P business in FY23 would lead to a 2.6 per cent drag on EPS estimate. “HCL Tech should deliver dollar revenue growth of 13.1 per cent over FY21-23. We expect Ebit margin to stabilise at 20 per cent in FY23E, which should help it deliver 14.3 per cent PAT CAGR over FY21-23E. HCLT’s recent revision in payout policy (at least 75 per cent of net income, up from 50 per cent) over FY22-26 is positive. A higher payout reflects a strategic shift to focus on organic growth and limit inorganic investments to bolt-on and capability based acquisitions,” Motilal said. This brokerage has a target of Rs 1,430 on the stock.
HCL Tech stock on Tuesday rose 1.3 per cent to Rs 1,148.60 on BSE.
