Recommendation from Computers - Software Sector

This column gives you scrip chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year.

HCL TECHNOLOGIES LIMITED : ‘COMPUTING’ THE BEST PROFITS

HERE IS WHY
✓Huge growth potential
✓Focus on cost reduction
✓Good returns on capital employed

HCL Technologies Limited offers its services and products through three business units: IT and Business Services (ITBS), Engineering and Research and Development Services (ERS) and Products and Platforms (P and P).

Through its cutting-edge co-innovation labs, global delivery capabilities and broad global network, HCL delivers holistic services in various industry verticals, categorized as financial services, manufacturing and technology. The company is spread across 49 countries with 150,000+ employees and its client base, including 250 of the Fortune 500 companies. The company has presented a robust performance in Q3FY21 with pick-ups in volume across major segments. Also, there was improvement seen in margins.

The company reported net sales of Rs 70,676 crore in FY20. It had reported net sales of Rs 60,427 crore in FY19 – an increase of 16.96 per cent. It had reported PBIDT of Rs 17,316 crore in FY20, an increase of 24.34 per cent. It had reported PBIDT of Rs 13,926 crore in FY19. The company reported PAT of Rs 11,057 crore in FY20, an increase of 9.26 per cent. It had reported PAT of Rs 10,120 crore in FY19. The company has reported cash from operating activities of Rs 13,359 crore in FY20 as against Rs 8,971 crore it reported in FY19.

Its net sales were at Rs 19,302 crore in December 2020, up by 6.44 per cent from Rs 18,135 crore in December 2019. PBIDT stands at Rs  5,624 crore in December 2020, up 21.49 per cent from Rs 4,629 crore in December 2019. It posted quarterly net profit at Rs 3,977 crore in December 2020 as against net profit of Rs 2,944 crore in December 2019 – an increase of 35.09 per cent. Its EBIT margin expanded 265 bps YoY to 22.9 per cent on account of selling, general and administrative expenses’ leverage and other gains. PAT margin stood at 20.5 per cent (improved by 430 bps YoY) due to tax benefits and increase in off-shore work.'

As businesses recover the negative impact of the pandemic and are willing to re-position themselves to the changing needs, cloud migration products and digital transformation services are expected to drive the growth going forward. Apart from the revenue growth, the company’s efforts to keep control of post-pandemic costs could improve the prospects further. The company is well-placed in terms of its order pipeline which could be further aided by the expected recovery in engineering and research and development segment in the coming quarters.

The company has signed 13 transformational deals across different sectors like financial services, healthcare, retail, etc. Cloud migration products and digital transformation services are expected to drive the growth going forward. As the company is well-placed in terms of its order pipeline which could be further aided by the expected recovery in the ERS segment in the coming quarters, it is expected that the momentum in revenue growth would continue in the coming few quarters. The company has zero promoter pledge with FIIs, FPIs or institutions increasing their shareholding. It has reduced its debt and is almost debt-free. The total debt to equity ratio is 0.09. On the returns front, it has ROE and ROCE of 23.87 per cent and 28.42 per cent respectively. By virtue of these factors, we recommend our reader-investors to BUY this stock.