Recommendations From IT Consulting & Software Sectors

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 

RIDE THE TECH WAVE WITH HCL TECH 

HERE IS WHY 
Acquiring firms to accelerate inorganic growth 
Robust financial performance 
Reasonable valuation 

Technological innovations are reshaping the world we live in. Therefore, it is a time to invest in companies which are continuously innovating themselves technologically. Precisely the reason why we picked HCL Technologies. 

HCL Technologies is an Indian multinational information technology (IT) services and consulting company. The company has presence in 44 countries, including the US, Europe and rest of the world (ROW). It operates across various segments, such as IT and business services (mode 1), engineering and R&D services (mode 2) and product & platform (mode 3). Mode 1 contributes 70 per cent of HCL's revenue and the other two modes contribute 19 per cent and 11 per cent, respectively. It also operates in various verticals such as financial services, manufacturing, technology and services, retail and CPG, telecommunication, media, publishing & entertainment, life sciences & healthcare and public services. The first three segments contribute almost 60% of the total revenue of the company. 

On a consolidated basis, the total income for the company rose by 18.36 per cent to Rs.16,427 crore in the June quarter of FY20. The EBITDA grew by 10.28 per cent to Rs.3570 crore in the first quarter of FY20 from Rs.3237 crore in first quarter of FY19 due to better performance of IT and business services. Its net profit declined by 8.26 per cent to Rs.2,230 crore in June quarter of FY20, due to increased outsourcing cost, employee benefit expenses as well as increase in non-cash items such as depreciation and amortisation expense. 

HCL Technologies acquired select IBM products for security, marketing, commerce and digital solutions for about Rs.12,700 crore in an all-cash deal. As part of the deal, HCL takes full ownership of the research and development, sales, marketing, delivery, and support for IBM products. HCL also completed the acquisition of Strong-Bridge Envision (SBE), a digital transformation consulting firm, which will help HCL to penetrate overseas markets. Along with that, HCL launched HCL Software, a new business unit that provides modernised software products to businesses to help them transform their environment. 

It is expected that the demand for technologies will continue to rise and HCL is accelerating its evolution with the adoption of a unique roadmap for growth with Mode 1-2-3 strategy. Mode 1, 2, 3 contributed 70.3 per cent, 18.8 per cent and 10.8 per cent to the revenue, respectively, at the end of June 2019. In terms of geographical presence at the end of Q1FY20, America contributed 67.7 per cent and Europe contributed 25.9 per cent of the total revenue of the company. The company still earns majority of its revenue in USD and hence as the value of rupee is depreciating against the dollar, it is expected that the profitability of the company will increase. The management has also guided 14 to 16 per cent revenue growth in constant currency for FY20. The share price of the company is trading at PE of around 14x, which is lowest among its peers. Looking at the valuation and growth, both organic and inorganic, you can BUY the scrip for the long term