HCL Technologies (HCL) is a leading global technology company. HCL offers its services
and products through three business units - IT and Business Services (ITBS), Engineering
and R&D Services (ERS) and Products & Platforms (P&P).
- Structural changes in the IT industry: We believe that to navigate businesses
through the current crisis, digitization and use of technology will be of prime
importance. There is high demand for services like i) digital transformation, ii)
cyber security, iii) cloud.
- Strong order booking and pipeline with Margin improvement: For Q2FY21, order
booking was 35% higher than the preceding quarter which led to order pipeline growth
of 20% QoQ and currently is at all-time high. HCL witnessed strong renewals and
signed 15 new transformational deals. HCL delivered 21.6% EBIT margins in Q2 FY2021,
which is an expansion of 108 bps QoQ.
- Improved Revenue and Margin guidance: Revenue guidance for Q3 and Q4 stands
at 1.5 to 2.5% in constant currency terms. This translates into 0.5 to 0.7% revenue
growth for FY21, as against earlier guidance of contraction in range of 0.8 to 2.3%.
The EBIT guidance has been revised to 20-21% from 19.5-20.5% earlier.
- Dedicated cloud business unit to drive future growth: To accelerate enterprise
cloud adoption, HCL tech has launched a dedicated cloud business unit. The new extensive
and strategic partnership with Google cloud will help organizations accelerate their
Outlook & Valuation
We believe HCL is a key beneficiary of increasing IT spends globally. The business
is seeing significant traction in cloud, workplace transformation, digital, and
cyber security. The deal pipeline is robust with healthy large deal wins. We believe
HCL valuation should expand and the P/E difference as compared to Infosys &
TCS should narrow. HCL is currently trading at 15.4x FY22 earnings.