HCL Tech stock playing catch up with peers after lagging for three months

Strong deal pipeline is keeping analysts bullish; 41 out of 45 have a 'buy' rating

After a period of consolidation, shares of India's fourth-largest IT company, HCL Technologies, are seeing renewed investor interest. Analysts say sustained deal momentum and attractive valuation make a case for the stock’s re-rating.

After lagging its four large peers in the past three months, HCL Technologies has emerged as the second-best performing IT stock in the past month, and is now less than 3 per cent away from its all-time high.

While a handful of countries have begun inoculating their citizens with recently approved vaccines, a large part of the western world (the US and Europe) continues to grapple with the second wave of Covid-19 infections. Experts, however, expect the second wave to have a relatively negligible impact on businesses as companies have shifted to the “work-from-home” model. Increased demand for such a model is seen accelerating digital spends, which is not only positive for the company but also the sector. “We expect HCL Technologies to benefit significantly from cloud transformation spending globally, as enterprises prepare for cost savings and improved technology adoption. HCL Technologies has been gaining traction, as witnessed in recent large deal wins,” said global investment firm Macquarie.

After its September quarter results, the company highlighted that it signed 15 contracts last quarter and that renewals continued to remain robust. The deal pipeline, too, was healthy, led by demand in digital foundation areas, such as app modernisation and cybersecurity, and improving traction in key business verticals, such as BFSI (banking, financial services and insurance), retail, and health care.

HCL Tech is also one of the cheapest large-cap IT stocks, barring Tech Mahindra. It trades at a 12-month forward price-to-earnings multiple of 19.5, which is at a discount of 26 to 40 per cent to Infosys and TCS while offering similar growth prospects.

At 21.6 per cent, the company reported its highest operating profit margins in over five years during the September quarter aided by a reduction in travel and other overhead costs. While this is lower than 25-26 per cent for Infosys and TCS, which is also a reason for the valuation discount, analysts believe some of the margin benefits may fade with the expected cost reversals and wage hikes.

Nonetheless, with growth prospects improving, earnings momentum is expected to improve. As compared to 10.8 per cent growth in FY20, HCL Tech's earnings are estimated to grow 12 per cent in FY21 and 17 per cent in FY22.

Therefore, most analysts are bullish on the company's prospects. According to Bloomberg poll, 41 of 45 analysts have a “buy” on the stock, with just three “hold” and one “sell” rating.