HCL Technologies

MANAGEMENT SPEAK
Moving in the right direction
BUY*

We attended HCL Technologies (HCLT) analyst Day, where the management laid
16 May 2022 out its key business strategies. Company maintained a positive view on demand
environment across industries despite of the macro uncertainties. HCLT will
BSE Sensex: 52794 prioritise growth in cloud- keeping it at the core in digital business. It aims to
Sector: IT Services focus on new markets, develop ecosystem and leverage cross sell opportunities
to pursue growth. We believe HCL is moving in the right direction with re-aligning
services portfolio towards growth areas (moving away from legacy IMS heavy
structure). We maintain our buy rating with TP of 1,290, implying 21XFY24 EPS.

Stock data ER&D to be the growth lever with digital engineering at its core: Digital
engineering to remain a key area with HCL ERS Digital Engineering revenue mix
CMP (Rs) 1,052
growing from 25% in FY21 to 29% in FY22. Both traditional eng and digital eng. is
Mkt Cap (Rs bn/USD m) 2,855.2 /36,867 growing above market growth rates with higher margins in traditional eng., thus
providing room to further invest in digital.
Target Price (Rs) 1,290
Products & Platforms to remain WIP as shift towards SaaS continues: HCL’s
Change in TP (%) 
strategy to convert more licensing into subscription based sales will reduce the
Potential from CMP (%) 22.6 volatility in the business and make revenues more predictable. The previous
underperformance in the P&P business margins was due to investments in sales.
Earnings change (%)
Such conversion & investments are expected to support the top-line moving
FY23E  forward, but the same would take some time.

FY24E  Growth in Cloud to overshadow decline in legacy data centre business: HCL
Cloud Business is well positioned to win in cloud ecosystem given its prowess (as
Bloomberg code HCLT IN
highlighted in analyst reports) and strong growth in underlying industry. There has
1-yr high/low (Rs) 1,378/897 been a shift towards ecosystem based model which is harnessing the strategic
relationship with the partners. With HCL’s ‘Cloudsmart’ offering and HCL
6-mth avg. daily volumes (m) 4.2 engineering heritage in ER&D business, we expect cloud to be a major driver for
6-mth avg. daily traded value HCLT’s growth. Shift towards Distributed, Multi-Cloud and Hybrid Cloud will evolve
the mix towards cloud with 81% data centre contribution in FY22 moving down to
(Rsm/USDm) 4,886.4/63.1 61% in FY25 and 19% public cloud contribution moving up to 39% in FY25.
Shares outstanding (m) 2,713.7
Valuation & View: The stock currently trades at 17.1x FY24E EPS. We expect
Free float (%) 39.3 HCLT to deliver strong growth in the services and ER&D businesses in FY23 and
beyond. Further change in stance towards payout (88% for FY22) is also
Promoter holding (%) 60.7 encouraging. We maintain our BUY rating for HCLT given its deep capabilities in
the IMS space (including cloud) & digital eng. And strong strategic partnerships;
Price performance – relative & absolute Our target price of Rs.1,290 (22.6% upside) is based on 21x FY24E EPS (25%
HCL Technologies Sensex
300
discount to INFO).

Key valuation metrics

200
Year to 31 Mar FY20 FY21 FY22 FY23E FY24E
100 Net sales (Rs m) 7,06,780 7,53,790 8,56,510 9,91,479 11,23,319
Adj. net profit (Rs m) 1,10,920 1,24,078 1,35,176 1,44,635 1,66,554
0
May-19 Feb-20 Nov-20 Aug-21 May-22 Adj. EPS (Rs) 40.8 45.7 49.8 53.4 61.5
% change 9.1 11.9 9.0 7.1 15.2
(%) 3-mth 6-mth 1-yr
PE (x) 25.8 23.0 21.1 19.7 17.1
HCLT IN (9.6) (10.3) 16.1 Price/ Book (x) 5.6 4.7 4.6 4.5 4.3
BSE Sensex (9.2) (13.0) 8.4 EV/ EBITDA (x) 17.0 14.0 13.8 12.1 10.4
RoE (%) 23.7 22.1 21.9 23.0 25.7
RoCE (%) 26.4 25.8 24.2 26.7 29.6
Source: Company, DAM Capital Research

Anmol Garg Vivek Doshi

anmol@damcapital.in vivek@damcapital.in
+91 22 42022596 +91 22 42022660

For Private Circulation only “Important disclosures appear at the back of this report”
 HCL Technologies

Highlights of the event

 Key business strategies
The management stated 5 key business strategies:
 Leadership through differentiated services and products by looking at innovation in service portfolio. Cloud is the
biggest demand driver and HCLT is witnessing tremendous opportunity
 Employer of choice in professional services across all key geographies and there is just 1% attrition in top
leadership over the past years.
 Preferred Digital Partner for Global 2000 Enterprises in chosen markets. 70% of the total tech spends is in
G2000 enterprises and 15 countries contribute to 85% of the tech spends.
 Weaving ESG goals into business strategy
 Deliver top quartile TSR over the medium term

 Emerging demand drivers

 There is a shift from legacy & boutique vendors for scale digital programs
 51% of global tech spends expected to be on the cloud by 2025, which is a megatrend.
 Evolvement of IT Model to business IT model, AIOps & DevSecOps, with more emphasis on digital. Customers are
looking efficiency on all the time for cost savings in digital transformation
 Leveraging ecosystem for innovation and growth opportunities
 Increasing Global sourcing of Engineering and R&D services is taking off in a big way
 Digital Economy is a Top 3 industry vertical in US
 Increased acceptance of offshoring and nearshoring in talent starved world

Exhibit 1: Cloud Transformation USD 917b opportunity, expected to grow at 20% CAGR in medium term

Source: Company, DAM Capital Research

 Growth priorities
 Cloud is at the core of all propositions – Digital Business, Digital Foundation, Digital Operations and Digital
Engineering.
 Strategic programs to deepen engagements with clients with big spend potential - F200, G500, Global 100 R&D.
60 of top 100 are meaningful relation with HCL in ER&D.

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 HCL Technologies

 Focus & New Frontier Markets through dedicated Go to Market teams

 Develop partner ecosystem to drive growth through hyperscalers, OEMs and SaaS platforms
 Leverage Cross-sell opportunities across ITBS, ERS and P&P clients. 2 fortune 100 companies where cross sell
happened led to 2 mega deals wins.

 Profitability priorities
 Pricing is evolving through non-linear models leveraging Automation & Solution accelerators. Even in managed
services, there is a changing in pricing types for e.g. pricing based number of incidents that are avoided
 Taking sustainable rate hikes for both traditional & digital work
 Enabling global delivery model from 20+ countries – Onshore, Offshore & Nearshore. HCLT has built a number of
centers in both onsite and offshore and nearshore
 Tapping the largest talent pool though fresher hiring, TechBees program and through alternate talent
 Cross-sell & scale accounts to the next client category or higher

 Digital business
 Top Performing Enterprises in every Industry have accelerated digital agenda in Past 2 Years and digital mix will
continue to increase.
 HCLT has a unique strength in integrating and transforming Application and Infrastructure services
 HCLT has capabilities for value Chain transformations through application & data modernization, cloud Adoption,
analytical Insights and AI, right from design to DevOps.
 HCLT has developed strong partnerships across SaaS, Cloud, Enterprise Apps and Data Analytics. Some of the
players not heard 5 years ago have become more significant now.
 HCLT has ability to hire talent across the world thereby having global scaling capability of digital talent.
 HCLT’s digital business has demonstrated 54+ customer renewals with enhanced scope for digital transformation
and 66+ new customer deal wins in Digital business since 2020

Exhibit 2: HCL has developed a strong partner ecosystem

Source: Company, DAM Capital Research

 Product & Platforms

 HCLT had 2 key objectives while it entered in to Products & Platforms business, namely (1) Wanted to get market
permission that HCL is a enterprise software provider (2) Wanted to get a bunch of customer at enterprise scale
and get an opportunity to play in market scale.
 HCLT currently has 6800 customer, with 66 fortune 100 clients, 223 fortune 500 clients, 241 Global clients and
540 global 2400 clients. Currently, it has 750+ sales people and it is present in 132 countries served by them.
 It operates in 4 key markets: (1) Digital transformational market- 4700 customers (2) AI and Intelligent
Automation (Big Fix)-2300 customers (3) Data & Analytics Market- 650 customers (4) Industry Software Group
Market- 40 customers

3 | DAM CAPITAL 16 May 2022

 HCL Technologies

Exhibit 3: HCL's key markets- AI & Intelligent Automation expected to grow at 16.5% CAGR

Source: Company

 HCLT’s 6 point strategy for an integrated portfolio

 Differentiated Execution by Product Mix by starting to look at the products in different segments
 Increased Renewal Focus
 Shift to XaaS model and subscription pricing. Current mix of the revenue is 67% subscription and support,
30% licenses and 3% services.
 Increased Focus on Indirect Channels –Reseller, SI, MSP, OEM, hyperscalers through partner engagement
platform, incentives, marketing & lead passing and partner recognition.
 Increase Profitability for IP Partnership Products
 Leveraging the P&P installed base for Services expansion

Exhibit 4: Shift to Integrated Portfolio Aligned with Chosen Markets

Source: Company, DAM Capital Research

4 | DAM CAPITAL 16 May 2022

 HCL Technologies

Story in charts
Exhibit 5: HCLT to report robust growth in FY23/24 on the back Exhibit 6: …expect double digit revenue growth despite drag
of increased digital adoption and high ER&D exposure… from P&P business

Revenue growth (USD %) Products & Platform (Growth %)

20.0 70.0 60.2
15.1 60.0
15.0 12.8 13.5 50.0
11.9 12.4 12.0
10.1 40.0
10.0 30.0 21.9
20.0
5.0 2.4 10.0 2.3 3.0
(0.4)
-
0.0 (10.0)
FY19
FY17

FY18

FY20

FY21

FY22

FY20

FY21

FY22
FY23E

FY24E

FY23E

FY24E
Source: Company, DAM Capital Research Source: Company, DAM Capital Research

Exhibit 7: Margins only to improve after FY23… Exhibit 8: …leading to ~11.1% PAT CAGR over FY22-24E
EBIT margins (%) PAT Growth (%)
22.0 21.4 20.0

21.0 15.3 15.2

20.3
19.8 15.0
20.0 19.6 19.6 12.1
18.9 9.5 9.3 9.0
19.0 18.5 10.0 7.7
18.2 7.1
18.0
5.0
17.0
16.0 0.0
FY17

FY18

FY19

FY20

FY21

FY22

FY23E

FY24E

FY17

FY18

FY19

FY20

FY21

FY22

FY23E

FY24E
Source: Company, DAM Capital Research Source: Company, DAM Capital Research

Exhibit 9: ROE expected to expand on improving performance

RoE (%)
30.0 26.5
25.0 26.1 25.7
23.7 23.0
22.1 21.9
22.5

15.0

7.5

0.0
FY17 FY18 FY19 FY20 FY21 FY22 FY23E FY24E
Source: Company, DAM Capital Research

5 | DAM CAPITAL 16 May 2022

 HCL Technologies

Income statement Key ratios

Year to 31 Mar (Rs Year to 31 Mar FY20 FY21 FY22 FY23E FY24E
FY20 FY21 FY22 FY23E FY24E
m) EBITDA margin (%) 23.7 26.9 23.6 23.2 23.5
Net sales 7,06,780 7,53,790 8,56,510 9,91,479 11,23,319 EBIT margin (%) 19.6 21.4 18.9 18.2 18.5
% growth 17.0 6.7 13.6 15.8 13.3 PAT margin (%) 15.7 16.5 15.8 14.6 14.8
Operating expenses 5,39,550 5,51,315 6,54,650 7,61,230 8,58,938 RoE (%) 23.7 22.1 21.9 23.0 25.7
EBITDA 1,67,230 2,02,475 2,01,860 2,30,249 2,64,381 RoCE (%) 26.4 25.8 24.2 26.7 29.6
% change 18.1 21.1 (0.3) 14.1 14.8 Gearing (x) 0.0 0.0 (0.1) (0.1) (0.1)
Other income 1,790 5,560 8,294 9,915 11,233 Net debt/ EBITDA (x) (0.1) (0.1) (0.3) (0.3) (0.3)
Net interest cost 0 0 0 0 0 FCF yield (%) 4.0 6.3 5.5 4.8 5.6
Depreciation 28,400 41,384 40,169 49,574 56,166 Dividend yield (%) (0.8) (2.5) (4.2) (3.8) (4.4)
Pre-tax profit 1,40,620 1,66,651 1,69,985 1,90,589 2,19,448
Deferred tax 0 0 0 0 0
Current tax 29,380 42,085 34,407 45,741 52,668 Valuations
Profit after tax 1,11,240 1,24,565 1,35,578 1,44,848 1,66,781 Year to 31 Mar FY20 FY21 FY22 FY23E FY24E
Preference dividend 0 0 0 0 0 Reported EPS (Rs) 40.8 45.7 49.8 53.4 61.5
Minorities (320) (488) (403) (213) (226) Adj. EPS (Rs) 40.8 45.7 49.8 53.4 61.5
Adjusted net profit 1,10,920 1,24,078 1,35,176 1,44,635 1,66,554 PE (x) 25.8 23.0 21.1 19.7 17.1
Non-recurring items 0 0 0 0 0 Price/ Book (x) 5.6 4.7 4.6 4.5 4.3
Reported net profit 1,10,920 1,24,078 1,35,176 1,44,635 1,66,554 EV/ Net sales (x) 4.0 3.8 3.3 2.8 2.5
% change 7.6 11.9 8.9 7.0 15.2 EV/ EBITDA (x) 17.0 14.0 13.8 12.1 10.4
EV/ CE (x) 4.8 4.0 4.0 3.8 3.7

Balance sheet
As on 31 Mar (Rs m) FY20 FY21 FY22 FY23E FY24E Shareholding pattern
Paid-up capital 5,12,054 6,12,370 6,20,114 6,37,894 6,58,369
Preference capital 0 0 0 0 0
Reserves & surplus 0 0 0 0 0
Shareholders' equity 5,12,054 6,12,370 6,20,114 6,37,894 6,58,369
Total current liabilities 2,36,402 1,77,273 1,87,808 2,17,402 2,46,311
Total debt 28,326 38,972 39,259 39,259 39,259
Deferred tax liabilities 0 0 0 0 0
Other non-current
48,817 49,851 43,276 50,096 56,757
liabilities
Total liabilities 3,13,545 2,66,095 2,70,343 3,06,757 3,42,327
Total equity & liabilities 8,25,599 8,78,465 8,90,457 9,44,651 10,00,696
Net fixed assets 85,129 85,246 80,489 75,485 69,817
Investments 64,788 56,855 56,615 65,226 73,637
Cash 48,290 66,468 1,05,121 1,15,227 1,28,902
Other current assets 3,34,338 3,72,429 3,75,464 4,16,557 4,56,811
Deferred tax assets 0 0 0 0 0
Other non-current
2,93,054 2,97,466 2,72,768 2,72,768 2,72,768
assets
Net working capital 1,46,226 2,61,624 2,92,777 3,14,382 3,39,402
Total assets 8,25,599 8,78,465 8,90,457 9,45,264 10,01,935 As of Mar-22

Cash flow
Year to 31 Mar (Rs
FY20 FY21 FY22 FY23E FY24E
m)
Pre-tax profit 1,40,620 1,66,651 1,69,985 1,90,589 2,19,448
Depreciation 28,400 41,384 40,169 49,574 56,166
Chg in Working capital (15,600) 30,410 (5,490) (13,290) (13,095)
Total tax paid (25,580) (34,450) (34,430) (45,741) (52,668)
Net Interest 0 0 0 0 0
Others (1,740) (7,400) (3,850) 0 0
Operating cash flow 1,33,590 1,96,180 1,71,250 1,81,132 2,09,852
Capital expenditure (18,290) (17,530) (15,640) (44,570) (50,497)
Free cash flow (a+b) 1,15,300 1,78,650 1,55,610 1,36,561 1,59,354
Chg in investments (1,23,540) (5,270) 21,190 0 0
Debt raised/(repaid) (15,430) (67,810) (4,310) 0 0
Net interest (2,510) (2,980) (2,250) 0 0
Capital raised/(repaid) 0 0 0 0 0
Dividend (incl. tax) (16,250) (32,560) (1,13,890) (1,26,855) (1,46,079)
Other items 2,930 (7,920) (24,510) 0 0
Net chg in cash (21,740) 27,610 5,120 10,107 13,675

6 | DAM CAPITAL 16 May 2022

 HCL Technologies

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Contd…

7 | DAM CAPITAL 16 May 2022

 HCL Technologies

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Explanation of Ratings:
*Research Entity (RE) has adopted a new rating system which provides for stock ratings on the basis of absolute projected returns. The RE was earlier
following a rating system of defining stock rating on the basis of change relative to the projected index returns.

New Rating System Old Rating System

Investment Ratings Expected returns (over 12-month) Investment Ratings Expected returns (over 12-month)
Buy > =10% Outperformer More than 5% to Index
Sell < -5% Underperformer Within 0-5% (upside or downside) to Index
Neutral <-5% to 10% Neutral Less than 5% to Index

Copyright in this document vests exclusively with DAM Capital Advisors Limited (Formerly IDFC Securities Limited).
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Research Analyst INH 000000 131
Stock Broker
NSE Capital Markets
NSE Futures & Options
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BSE Futures & Options
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8 | DAM CAPITAL 16 May 2022

 HCL Technologies
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