Motilal Oswal recommends buy for HCL Tech, neutral stance on Wipro

Chennai, Jan 15: Broking company Motilal Oswal Financial Services Ltd has recommended that investors buy shares of HCL Technologies Ltd (HCLT) while remaining neutral on Wipro Ltd’s shares.

According to Motilal Oswal, a buy recommendation means the stock would give a return of over 15 per cent over a 12 month period.

In a report, Motilal Oswal said HCLT delivered a robust 3QFY24 performance, with a six per cent quarter-on-quarter (QoQ) revenue growth in constant currency (CC) terms.

This growth was driven by seasonal gains in HCL Software (P&P), which rose 34 per cent QoQ. HCLT’s Services grew 3.1 per cent QoQ in CC terms with healthy growth in both the IT and ER&D verticals.

“We were impressed by the strong beat on both Services and P&P from the company, despite various macro headwinds that have led to a decline in growth among key competitors. More importantly, the implied 4Q guidance for the Services vertical indicates that it will grow next quarter despite lower deal wins and a high base.

“This is in contrast with peers who have indicated a tough quarter led by macro challenges. In our view, this should help HCLT narrow the valuation gap with our coverage universe,” Motilal Oswal said.

According to the broking company, the strong growth guidance and margin performance in a weak demand environment should boost investor confidence on HCLT’s business and reduce the valuation gap with larger Tier-1 peers.

“HCLT remains our top pick in the IT Services coverage for 2024. After the strong 3Q results and beat, we have raised our FY24-26E EPS by 3 per cent to 4 per cent. We reiterate our BUY rating with a TP (Target Price) of Rs1,880, as we roll forward our P/E-based valuation to FY26 and assign a multiple of 24x,” Motilal Oswal said.

The stock is currently changing hands at about Rs.1,581 per share. As regards Wipro, the broking company said the former’s third quarter was positive given that the company struggled to deliver on expectation over the last few quarters due to macro headwinds.

Moreover, the management commentary on higher deal wins in the Consulting vertical indicates that the drag from that segment is now bottoming out, which should help improve overall growth, Motilal Oswal said.

According to Motilal Oswal, Wipro’s weak 4QFY24 revenue growth guidance is a concern, along with unchanged commentary on demand and discretionary spending.

Motilal Oswal expects WIPRO to return to growth in FY25 after posting a decline in FY24, the weak base should result in revenue growth lower than that of peers.

Maintaining a neutral stance on Wipro’s scrip, Motilal Oswal said its target price for the former’s shares is Rs.520 based on 19x FY26E earnings per share (EPS). The Wipro shares are changing hands at around Rs.498 at BSE.