Confident of leading industry performance for next 2-3 years – HCL Tech

Update on Indian Equity Market:

Markets started the fresh week on a selling spree as Nifty closed the day 205 points lower at 14,228. The intensity of selling was such that only six out of 50 stocks closed the day in green led by UPL (6.3%), RELIANCE (2.1%), and TITAN (1.3%) while TATAMOTORS (-6.1%), TATASTEEL (-5.9%), and ONGC (-5.1%) led the losing pack. All the sectoral indices closed the day in red with METAL (-4.6%), PSU BANK (-3.1%), and PHARMA (-3.1%) bleeding the most.

Excerpts of an interview with Mr C. Vijayakumar, President & CEO- HCL Technologies Ltd (HCL Tech) with CNBC TV18 dated 15th January 2021:

• The company reported revenue growth of 3.5%, higher than the guidance. The margin for the quarter was also at a six-year high. Mr Vijayakumar said that the company has outperformed guidance for two quarters in a row led by a stupendous performance from products and platforms segment.
• He said that DWS acquisition would contribute to 1% growth in 4QFY21E. The company has signed 13 deals across verticals. The company is positive about the outlook for FY22E.
• The next five years are expected to be better than the past five years. The company is expected to lead the industry performance for the next 2-3 years. 
• More work and revenue shifting of offshore and sales, general, and administrative (SGA) leverage contributed to superior margin performance in 1HFY21. Some of the expenses are expected to come back, but not at pre-COVID levels.
• The company gave the salary increments to a large section of employees during 3QFY21. This has led to a headwind of 50 bps in margins. Further, the company is expected to give increments to seniors and a larger population which would be eroding about 80 bps from the margins.

Consensus Estimate: (Source: market screener)
• The closing price of HCL Tech was ₹ 978/- as of 18-January-2021. It traded at 20x/ 19x/ 17x the consensus earnings estimate of ₹ 49.3/ 52.0/ 58.0 for FY21E/FY22E/23E respectively.
• The Consensus price target of HCL Tech was ₹ 1,073/- as of 18th January 2021 which is 19x of FY23E EPS estimate of ₹58.0/-.

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