On Monday, Morgan Stanley maintained its Overweight rating on HCL Technologies (HCLT:IN) stock and increased the shares target to INR1,705.00 from INR1,650.00.
The firm's analyst highlighted the need for HCL Technologies to execute strongly in the second to fourth quarter to achieve its forecasted growth for the fiscal year 2025 in the Services business. According to the analyst's assumptions, growth for HCL Technologies is expected to align with the mid-point of the company's guidance.
The analyst noted that in fiscal years 2023 and 2024, HCL Technologies reported superior EBIT (earnings before interest and taxes) growth compared to its industry peers, such as Infosys (NS:INFY:IN). However, following a weaker first quarter, the analyst anticipates that HCL Technologies might experience lagging EBIT growth in fiscal 2025 relative to its peers.
The report also compared HCL Technologies' revenue growth prospects to Tata Consultancy Services (NS:TCS:IN), suggesting that HCLT could potentially outperform TCS if the Banking, Financial Services, and Insurance (BFSI) sector recovers.
Despite this, the narrowing of the price-to-earnings (P/E) multiple discounts to TCS and Infosys, currently at 11% and 5% respectively, was mentioned as a factor making the risk-reward less attractive for HCL Technologies on a relative basis.
Lastly, the analyst reflected on the recent market performance, stating that the strong outperformance of HCL Technologies' shares relative to TCS in the last one and a half months, along with the reduced P/E multiple gap, suggests a comparative bias in favor of TCS in terms of risk-reward. This assessment comes as investors and market watchers evaluate the potential of HCL Technologies amidst a competitive industry landscape.
In other recent news, CLSA downgraded HCL Technologies from 'Outperform' to 'Hold', with a minor price target adjustment to INR 1,556 from INR 1,558. This change is largely due to the offshoring of a significant contract in the Banking, Financial Services, and Insurance (BFSI) sector and the annual practice of providing productivity benefits to major clients in the first quarter.
HCL Technologies recently reported its first-quarter financial year 2025 revenue at $3,364 million, a 5.6% increase year-over-year but a 1.9% decrease quarter-over-quarter in constant currency terms. The sequential revenue decrease was primarily linked to the offshoring and productivity benefits mentioned earlier.
Despite the downgrade, HCL Technologies' Ebit margin remained steady at 17.1%, aligning with consensus estimates and surpassing CLSA's predictions. The company's management has maintained its demand outlook and guidance for fiscal year 2025, projecting a revenue growth of 3-5% year-over-year in constant currency and an Ebit margin of 18%-19%.
CLSA's downgrade also reflects HCL Technologies' valuation, currently standing at a 24x PE ratio and a mere 13% discount to Tata Consultancy Services (TCS), the smallest discount in six years. According to CLSA, the strong quarters usually expected for HCL Technologies are already factored into its valuation.
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