Analysts Bet On HCL Technologies' Five-Pronged Growth Strategy

Analysts expect HCL Technologies Ltd.'s focus on cloud technology, deal wins, growth in engineering, research and development and services segments to bode well for the software services exporter.

The IT services company, on its analyst day, listed five strategic objectives, which it will focus on to create value for all stakeholders, according to brokerage notes.

HCL Tech's road map to drive growth:

1. Leadership through differentiated services and products: HCL Tech expects to differentiate its offerings through innovation, cloud capabilities, integrated solutions, and accelerators.

2. Employer of choice in professional services across geographies: It prides itself on being a company of choice for employees.

3. Preferred digital partner for global 2000 enterprises, with 70% of tech spends by these entities. HCL Tech will focus on these clients selectively to transform brands at scale.

4. ESG is a major focus area of the company, with support at the board level and a desire to continue to increase diversity.

5. The management’s focus will be to organically grow the business, while maintaining a high capital allocation and sustainability in growth.

Analysts also termed HCL Tech's valuations as "attractive".

Last month, the company had reported its fourth-quarter results. It saw its revenue and net profit rise sequentially but margins contract. Analysts had then forecast "strong services growth" but margin to remain under pressure.

HCL Tech closed with 0.1% losses in Thursday's session even as equity benchmarks declined over 2%. The rupee depreciation helped the information technology stocks.

Of the 48 analysts tracking the company, 36 maintain a 'buy', 11 suggest a 'hold' and one recommends a 'sell', according to Bloomberg data. The average of the 12-month target price implies an upside of 23.7%.

Here's what analysts have to say about HCL Tech's growth strategy...

Jefferies

• Maintains 'buy' with a target price of Rs 1,360—an implied upside of 27.48%—as the investor day reinforces confidence on the company's ability to deliver on its revenue growth guidance of 12-14% YoY (constant currency).

• The strategy articulated by HCL Technologies to deliver organic growth was well-defined.

• Remains more confident of the company's ability to deliver on its revenue growth guidance.

• Tech moving from enabler to transformer, shift in spends to large-scale firms, rising cloud spends (estimated 51% of tech spends by 2025), increased engineering research and development sourcing, acceptance of offshore are likely to be the key demand drivers.

• Weak macroeconomic conditions have not led to cut in information technology spends.

• The company's strategy to keep cloud at the heart of all its propositions bodes well for long-term growth prospects.

• Digital engineering, presence in high-growth verticals, stable client base and investment in new geographies are likely to aid growth.

• Expects HCL Technologies to deliver 11% constant currency revenue CAGR and 10% earnings CAGR over FY22-25.

Motilal Oswal

• Maintains 'buy' with a target price of Rs 1,310—an implied upside of 22.84%.

• The stock continues to be attractively valued.

• The management's stance on IT services and ER&D verticals remain positive with the firm charting a strategy to return to growth in segments where it struggles.

• Continues to expect strong growth in its services portfolio in FY23, which should re-rate the stock.

• The five strategic objectives laid down by the company during the analyst day will drive value creation.

• HCL's focus on cloud technology augurs well for the company.

• Continued growth in legacy and digital engineering to aid stability.

• Higher exposure to cloud, which comprises a larger share of non-discretionary, offers best resilience to its portfolio.

• Growth is likely to be aided by strong sequential growth within services, robust headcount addition, healthy deal wins, and a solid pipeline.

• Valuations remain attractive and offer a margin of safety.

Kotak Institutional Equities

• Maintains 'buy' at a target price of Rs 1,380—an implied return of 29.66%.

• The company is on track for growth aided by robust demand environment, pricing benefits, growth in digital and ER&D segments.

• Multi-year initiative of cloud and digital transformation provide confidence on medium-term growth prospects.

• Clients are expected to continue spending on information technology services despite the global macro headwinds as technology is the 'biggest lever to transform business models'.

• There can be a reprioritisation to technology budgets to key imperatives like cybersecurity.

• Forecasts IT services to grow at 13-16% driven by growth in application services and ER&D.