Equity Research Report - HCL Technologies Limited

Summary

HCL Technologies Limited is an primarily India-based technology company.

Company Profile:

HCL Technologies is a next-generation global technology company that helps enterprises reimagine their businesses for the digital age. Our technology products and services are built on four decades of innovation, with a world-renowned management philosophy, a strong culture of invention and risk-taking, and a relentless focus on customer relationships. HCL also takes pride in its many diversity, social responsibility, sustainability, and education initiatives. Through its worldwide network of R&D facilities and co-innovation labs, global delivery capabilities, and over 211,000 ‘Ideapreneurs’ across 52 countries, HCL delivers holistic services across industry verticals to leading enterprises, including 250 of the Fortune 500 and 650 of the Global 2000.Enterprises across industries stand at an inflection point today. In order to thrive in the digital age, technologies such as analytics, Cloud and automation occupy center stage. In order to offer enterprises the maximum benefit of these technologies to further their business objectives, HCL offers an integrated portfolio of products and services through three business units. These are IT and Business Services (ITBS), Engineering and R&D Services (ERS), and Products and Platforms (P&P).ITBS enables global enterprises to transform their businesses via Digital Foundation, our modernized infrastructure stack built around hybrid cloud, software-defined networks, the digital workplace, and other elements; Digital Business, a combination of our application services and consulting capabilities; and Digital Operations, a three-pronged setup for modernized and efficient operations at enterprise level.

ERS offers engineering services and solutions in all aspects of product development and platform engineering.

Under P&P, HCL provides modernized software products to global clients for their technological and industry-specific requirements.The company’s DNA of grassroots innovation, its ingrained culture of co-innovation, and its tradition of going far beyond what is expected to create customer value, clearly differentiate it and gives it a distinct advantage in creating value for businesses in the digital and connected world.

Key Statistics :

Market Cap₹ 262154 Cr.

Current Price₹ 966.1

52W High₹ 1377.8

Stock P/E19.3

Book Value₹ 239.9

Dividend Yield4.35%

P/B4

Face Value2

52W Low₹ 877.3

Source: www.sharescart.com

Returns:

Source: www.bseindia.com

Shareholding Pattern :

Source: www.sharescart.com

Peer Comparison:

Source: www.sharescart.com

Growth Drivers:

Q1 FY’23 RESULTS

Revenue at US$ 3,025 mn; up 1.1% QoQ & up 11.2% YoY

Revenue up 2.7% QoQ & up 15.6% YoY in Constant Currency

Services Revenue (ITBS and ERS) up 2.3% QoQ & up 19.0% YoY in Constant Currency

EBITDA margin at 21.2%; EBIT margin at 17.0%

Net Income at US$ 424 mn (Net Income margin at 14.0%) down 10.7% QoQ & down 2.5% YoY

Revenue at â‚¹ 23,464 crores; up 3.8% QoQ & up 16.9% YoY

Net Income at â‚¹ 3,283 crores; down 8.6% QoQ & up 2.4% YoY.

Corporate and Financial Highlights.

1. Strong Booking performance: For Q1 FY’23, TCV of New Deal wins at US$ 2,054 mn, registering 23.4% YoY growth of which-

2. Services TCV at US$ 1,950 mn enabled by 7 net new large Services deal wins;

3. Products TCV at US$ 104 mn enabled by 9 net new large Product deal wins;

4. Significant number of small deals.

5. ACV is higher by 17.9% on a YoY basis.

6. Q1 FY’23 Revenue growth at 2.7% QoQ cc (15.6% YoY cc).

7.During Q1, Services business has grown at 2.3% QoQ cc (19.0% YoY cc).

8.Engineering and R&D Services grew at robust 3.7% QoQ cc (23.0% YoY cc) driven by traction in digital engineering and IoT Works. 

  IT and Business Services grew at healthy 2.0% QoQ cc (18.1% YoY cc), driven by acceleration in cloud transformation and application and data modernization.

• All round growth in Services (ITBS and ERS) across verticals and geographies YoY in constant currency for the quarter.
• Growth momentum led by Technology & Services (34.2%), Telecom, Media, Publishing & Entertainment (29.2%), Manufacturing (19.1%), Financial Services (16.4%), Lifesciences & Healthcare (15.7%) and Public Services (15.2%).
•   Geography growth powered by Europe (22.5%), Americas (17.5%) and ROW (18.2%).
•    Mode 2 continues to lead the growth momentum growing at 39.3% YoY in Constant Currency for Q1 FY’23.
•    Strong client addition across all categories. On YoY basis, US$ 100 mn+ clients up by 3, US$ 50 mn+ clients up by 5, US$ 20 mn+ clients up by 23, US$ 10 mn+ clients up by 35, and US$ 5 mn+ clients up by 27, US$ 1 mn+ clients up by 63.
•   Total headcount at 210,966 Up 19.5% YoY.
•   Cash Generation continues to be robust: Generated Operating Cash Flow of US$ 2,013 mn and Free Cash Flow of US$ 1,762 mn on LTM basis, being 112% and 98% of Net Income respectively.
•    Gross Cash stands at US$ 2,249 mn and Net Cash at US$ 1,724 mn at the end of June 30th, 2022.
•     The company has declared a dividend of ₹ 10/-, 78th consecutive quarter of dividend pay-out.

CORPORATE ACHIEVEMENTS

HCL Technologies has embraced change and innovation to help enterprises enhance customer experience, modernize their digital core and develop cloud-first and cloud migration approaches. The organization is also focused on deepening its focus on ESG and DE&I as well as becoming a recognized employer of choice globally.

Business Highlights

• HCL Technologies won 16 large services and products deals across diverse industry verticals like life sciences and healthcare, technology, manufacturing, and financial services.

• HCL Technologies acquired Confinale AG, a Switzerland-based digital banking and wealth management consulting specialist, and Avaloq Premium Implementation Partner. Through this strategic acquisition, HCL will enhance its footprint in the global wealth management market with emphasis on Avaloq consulting, implementation, and management capabilities.

• HCL Technologies opened a global delivery center in Vancouver, Canada. The new facility will have a Customer Experience Center dedicated to developing futuristic digital technologies and next-generation products and solutions for HCL Technologies' global customers.

• HCL Technologies announced the acquisition of Quest Informatics Private Limited - an aftermarket, Industry 4.0, and IoT company, in an all-cash deal. The acquisition will create synergies and enable meaningful engagements with clients in the end-to-end digital aftermarket space.

• HCL Technologies won the Microsoft Partner of the Year Award 2022 for Healthcare and Life Sciences (global winner), UK Microsoft Partner of the Year Award 2022 (country winner) and the Microsoft Supplier Prestige Award 2022 for Showstopper of the Year; Amplifying Accessibility. The Company was accorded the honors for demonstrating excellence in innovation and implementing customer solutions based on Microsoft technology.

• HCL Technologies launched its first comprehensive sustainability-focused solution, Net-Zero Intelligent Operations (NIO). NIO is a cloud-agnostic, scalable solution that enables enterprises to monitor, normalize, and reduce energy consumption and GHG emissions in real-time. This helps enterprises optimize the energy intensity of assets and processes. It also enables calculation, reporting and identifying emission optimization potential for workspaces and shop floors. The solution won the Cisco Global Digital Sustainability Challenge for the EMEAR (Europe, Middle East, Africa, and Russia) region.

• With an aim to mitigate its climate impact through integrated sustainability initiatives, HCL Technologies signed The Climate Pledge - a commitment to being net-zero carbon by 2040, 10 years ahead of The Paris Agreement. The Company has also received validation from the Science-Based Targets initiative (SBTi) for its targets aligned to the 1.5°C pathway. HCL is now formally a supporter of the Task Force on Climate-related Financial Disclosures (TCFD).

• HCL Technologies developed a Reflect Reconciliation Action Plan (RAP) to illustrate the organization’s commitment to reconciliation with Aboriginal and Torres Strait Islander peoples in Australia. The inaugural RAP, officially accredited by Reconciliation Australia, outlines HCL’s formal commitment to building relationships, respect and trust.

 •As a long-standing strategic partner of the World Economic Forum (WEF), HCL Technologies was an active participant at the WEF Annual Meeting 2022 in Davos, Switzerland. The HCL Technologies delegation was at the forefront of many critical conversations in the official agenda of the Annual Meeting and contributed to important discussions around themes including ESG and tech innovation.

•Underscoring its culture of ideapreneurship and innovation, HCL Technologies filed 15 patents, of which five were granted in the areas of software development, artificial intelligence, machine learning, next-generation technologies, and platforms including IoT, automation, and data analytics.

•HCL’s Value Portal, a unique grassroots innovation platform that enables employees to contribute ideas and create value for HCL Technologies and its clients, delivered customer value worth $216 M+ through 1300+ implementations.

KEY CLIENT WINS

HCL Technologies has a broad focus across the key themes of digital, engineering, and cloud. The organization 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). The Company continues to lead the industry with innovation and deliver offerings in an agile yet predictable manner with a global workforce. 

New Large Deals

·       One of the largest healthcare services providers in the U.S. selected HCL Technologies as its strategic technology partner in a multi-year engagement to manage end-to-end technology operations. As part of the deal, HCL will help transform the client’s workplace and data center landscape, kickstart its cloud journey, and modernize legacy compute, storage, and backup environment. These technology initiatives will help the client reduce its total cost of ownership and empower innovation and growth in the organization.

·       A Europe-based health and bioscience company signed an integrated IT-led business transformation deal with HCL Technologies. As part of the engagement, HCL will help the client transition to a product-based IT operating model, underpinned by a cloud-first strategy and next-generation security practices. HCL will apply its Fenix 2.0 digital execution framework to drive best practices and accelerate transformation at scale across the client’s business units and product lines.

·        A large global European bank chose HCL Technologies for cloud transformation and hybrid cloud operations. HCL will be providing a stable hybrid platform and also supporting migration of a large Oracle footprint onto Exadata cloud.

·        A leading global life sciences company based out of Europe extended its relationship with HCL Technologies to enable end-to-end security operations for the entire digital, IT and OT landscape. HCL will secure the dynamic posture of the client and patient data that’s crucial for discovering and manufacturing new medicines.

•   A Europe-based global automobile maker selected HCL Technologies as its largest IT services partner. The client expanded its engagement with HCL for executing the next phase of their digital transformation that includes setting up next-generation intelligent automation platform and an experience centric end-user support service to cover its global scale of business operations. Additionally, HCL will support the client with automotive manufacturing & logistics, online engineering related technology and domain competencies .     

  The North American subsidiary of a leading global automobile and power equipment manufacturer selected HCL Technologies to manage its digital workplace services. As part of this multi-year engagement, HCL will deliver unified customer experience and manage service desk, field support services and asset lifecycle management.

Product Deals

• A large Europe-based technology and IT services provider signed a multi-year, multi-product enterprise agreement with HCL Technologies to continue providing high quality IT support. The engagement covers the whole range of HCL Software products including Domino, Sametime, Connections, Unica , Secure DevOps tools, Volt MX, BigFix and Digital Experience portal.

• A major European government committed to a multi-year engagement with HCL Technologies for their data center that supports multiple business processes and internal communication needs, by leveraging the HCL DX Portal. The agreement reiterates the Government’s commitment to using highly reliable digital experience technology from HCL.

•  A U.S.-based global IT services giant renewed its commitment to continue running its mission critical applications on Domino. The IT firm also expanded use of HCL‘s secure development AppScan Technology.

• A U.K.-based global banking giant renewed and expanded their relationship with HCL Technologies for maintaining critical applications supporting business workflows and support systems.

•         A Japan-based software reseller signed an agreement to establish significant presence for HCL’s pro-low code software development platform Volt MX. With this agreement, multiple large Japanese enterprises are using HCL Volt MX for building modern apps.

•         A U.S.-based bank has selected HCL Technologies to manage their technical environment using the HCL Digital Experience Manager. HCL DX platform is instrumental in providing secure integrations to third party systems that allows the bank to offer customers secure and authenticated access to their financial accounts, loans, and investments.

•         A Europe-based public sector company selected HCL Technologies. As part of this engagement HCL will engage at every level of decision to pivot and expand from the existing DX footprint, growing with a CX overarching strategy, growing the actual DX usage, plus including Discover and Actian.

•         A Europe-based global consulting and audit company signed a multi-year engagement with HCL Technologies for BigFix suite of products. The client is using the suite as part of their vulnerability management program to improve operational efficiency and regulatory compliance.

• HCL Software products including Domino, Sametime, Connections, Unica , Secure DevOps tools, Volt MX, BigFix and Digital Experience portal.

•  A major European government committed to a multi-year engagement with HCL Technologies for their data center that supports multiple business processes and internal communication needs, by leveraging the HCL DX Portal. The agreement reiterates the Government’s commitment to using highly reliable digital experience technology from HCL.

• A U.S.-based global IT services giant renewed its commitment to continue running its mission critical applications on Domino. The IT firm also expanded use of HCL‘s secure development AppScan Technology.

•  A U.K.-based global banking giant renewed and expanded their relationship with HCL Technologies for maintaining critical applications supporting business workflows and support systems.

•   A Japan-based software reseller signed an agreement to establish significant presence for HCL’s pro-low code software development platform Volt MX. With this agreement, multiple large Japanese enterprises are using HCL Volt MX for building modern apps.

•         A U.S.-based bank has selected HCL Technologies to manage their technical environment using the HCL Digital Experience Manager. HCL DX platform is instrumental in providing secure integrations to third party systems that allows the bank to offer customers secure and authenticated access to their financial accounts, loans, and investments.

•         A Europe-based public sector company selected HCL Technologies. As part of this engagement HCL will engage at every level of decision to pivot and expand from the existing DX footprint, growing with a CX overarching strategy, growing the actual DX usage, plus including Discover and Actian.

•         A Europe-based global consulting and audit company signed a multi-year engagement with HCL Technologies for BigFix suite of products. The client is using the suite as part of their vulnerability management program to improve operational efficiency and regulatory compliance.

      FY 2023 Guidance

•                 Revenue expected to grow between 12% to 14% in constant currency.
•                 EBIT margin expected to be between 18% to 20%.

Source: Company Quarterly Presentation

Financial Highlights:

• Profit and Loss Account: (Rs. in crores)
• Balance Sheet : (Rs. in Crores)
• Cash Flow Statement: (Rs. in Crores)
• Source: www.sharescart.com

  Conclusion : 

  on the basis of the discount cash flow valuation method we are recommending 'Buy' for the stock. Since the stock  offers good opportunity, we initiate a 'Buy' signal on the stock with 12 month price target of Rs. 1033/- share an upside of 6.94% from current levels.