HDFC Securities is bullish on HCL Technologies has recommended buy rating on the stock with a target price of Rs 1255 in its research report dated January 08, 2019.
We recently hosted HCL Tech’s (HCLT) CFO for investor meetings. The discussions covered organic business and Mode-3 strategy (esp. the recent product acquisition). HCLT has under-performed peers ~30% over the last two years on (1) Organic growth slowdown, with IMS slowing from 9% to 4% YoY, and (2) Balance sheet-heavy capital allocation strategy. HCLT’s rev/PAT/OCF share in tier-1 IT has been steady at ~15%. However, the high investment intensity (USD 1.7bn ex-IBM products in acquisitions and IPP) relative to peers (35% capex share of tier-1 IT) has led to a disproportionate increase in balance sheet size.
We maintain faith in HCLT based on (1) Organic business recovery, supported by ramp-up of large deal wins, (2) ER&D/IMS pedigree (strong growth in >USD 50mn client bucket), (3) Strong ‘option value’ in synergies from product acquisition – cross-sell, market opportunity. Maintain BUY. Our TP is Rs.1,255 at 14x Dec-20E EPS (in-line with 5-yr avg multiple).
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