HCL Tech - Steadfast Execution To Drive Consistent Performance

August 29, 2024

ADD

Information Technology   

Analyst Meet Update   

TARGET PRICE (Rs) : 1,850

We attended HCLT’s ‘Analyst Day’ to understand its growth strategy and business outlook. KTAs: 1) Mgmt highlighted that industry is at a major inflection point, with rising adoption of AI. HCLT is well placed to benefit from the growing addressable IT Services market (~USD2trn by 2030) and its investments in fast-growing areas like data and AI, SAP cloud services market, cyber security, cloud migration, etc which create opportunities for double-digit growth in the medium term. 2) It indicated that demand setting is a tad more optimistic vs a few months ago, esp in BFSI. It expects TMT to continue seeing faster growth than peers. 3) HCLT delivered superior performance, backed by its cultural DNA, balanced portfolio, client mining and participation in large deals, passionate people, and strong governance. It plans to improve market participation with better G2000 /future G2000 coverage which will help sustain and accelerate growth. We roll fwd TP to Sep-25E, and lift up our target multiple to 25x (23x earlier); retain ADD and raise TP to Rs1,850 at 25x its Sep-26E EPS.

Growth leadership to continue

HCLT has delivered industry-leading organic growth over the last 2 years. Management remains confident of sustaining growth leadership in coming years, on the back of a) cultural DNA—entrepreneurial and empowering environment, stable & home-grown leadership, innovation driven by engineering pedigree, art of the possible - pragmatic approach to solutions, b) its all-weather portfolio (right mix of discretionary and non-discretionary services and IP) made possible by the execution of its Mode 1-2-3 strategy since 2016, c) client experience – 22 clients with a >USD100mn relationship versus 16 in FY22; track record of winning and executing large deals, d) passionate people with expansion into near-shore (headcount grew to 24,797 vs 21,497 in FY22) and new vistas (it India new vistas headcount scaled up to 25,218 vs 19,291 in FY22), e) approach to ESG (diverse board—70% independent, gender-balanced). Mgmt highlighted that the industry is at major inflection point, with growing adoption of AI. HCLT is well placed to benefit from the expanding addressable IT Services market (~USD2trn by 2030) and its investments in fast-growing areas like data and AI, SAP cloud services market, cyber security, cloud migration, etc which create opportunities to potentially see double-digit growth over the medium term. The Data and AI segment is poised to clock 19.1% CAGR, with the SAP cloud platform services market seeing CAGR of 26%. The TMT segment is registering the fastest growth among peers which it expects to maintain over the next 2 years. CSP industry tech spending remains one of the highest and is expected to register 8% CAGR, as telcos are seeing major transformation into service-oriented players driven by data. Semiconductor engineering is a key driver for HCLT in the TMT. HCLT is well positioned to see benefits, as it has presence in the entire ecosystem – from chip to cloud, as also driving AI transformation. In the BFSI segment, HCLT is focusing on white spaces seen in insurance brokerage firms, specialized banks, and large central banks.

‘Project Ascend’ to drive margin improvement

HCLT has launched ‘Project Ascend’ that focuses on 7 tracks for driving efficiencies and improving margin. These tracks are: GenAI-led delivery transformation (coding productivity, operational/managed services automation); employee pyramid (gain traction with growth acceleration); upskilling/reskilling via AI-led customized learning programs to improve utilization and productivity; new vistas in India drive operations stability; G&A optimization; non-linear models (leveraging industry-focused solutions and accelerators); GDM (nearshore-offshore mix). Some of these savings though are expected to be offset by planned investments in GenAI solutions development and S&M.