KR Choksey Says Hold HCL Technologies Stock: Target Set at ₹1,887

KR Choksey has given HCL Technologies a “Hold” rating, setting a target price of ₹1,887 in their report dated October 15, 2024.

Earnings Overview

HCL Technologies’ Q2FY25 earnings exceeded expectations, even though revenue was in line with projections. Here’s a summary:

• Revenue: The company’s revenue reached ₹288,620 million, showing a 6.2% year-over-year increase (1.6% quarter-over-quarter), mainly driven by growth in the IT and Business service segment (6.2% YoY) and the HCL software segment (9.4% YoY).
• PAT (Profit After Tax): The PAT was ₹42,350 million, up 10.5% YoY but slightly down 0.5% QoQ. This surpassed expectations by 2.9%, leading to a PAT margin increase of 31 basis points YoY, now at 14.7%.

Financial Highlights

• EBIT (Earnings Before Interest and Taxes): EBIT stood at ₹53,620 million, up 9.0% YoY and 11.8% QoQ, reflecting strong operational performance.
• Margins: The EBIT margin reached 18.6%, aided by margin improvements in the HCL software business and the service business, as well as favorable currency changes.

Growth Across Verticals

HCL Technologies experienced growth across all sectors except for the BFSI (Banking, Financial Services, and Insurance) segment:

• IT and Business Services: Grew 1.8% QoQ.
• Engineering and R&D Services: Increased by 1.1% QoQ.
• Product Segment: Showed sequential growth of 1.4% with margin expansion of 503 basis points, now at 25.6%.

Market Insights

• Geographic Growth: Revenue in the Americas grew by 1.0%, Europe by 4.2%, and the Rest of the World by 9.1%.
• Sector Performance:
  • Financial services had flat growth due to a planned divestiture.
  • Other sectors like Retail, CPG (Consumer Packaged Goods), and Healthcare showed moderate sequential growth ranging from 2.9% to 4.6%.

Future Outlook

While KR Choksey acknowledges the company’s solid performance and growth projections, they have downgraded the rating from “Accumulate” to “Hold” due to the stock’s high valuation, which is trading at an all-time high P/E ratio of 29.4x, much higher than its three-year average of 18.1x. They expect revenue and profit growth to continue but are cautious about sustainability at these elevated price levels.