HCL Technologies Valuation : About the Company
The business model is such that the company has 5 clients with $ 100+ Million business, 30 clients with $ 50+ Million business and 1270 clients with $ 10 million or less worth of business. The revenue contribution break up is such that the top 5 clients contribute 15.1% of the revenue and top 20 contribute 32% of the revenue. The key business relationships are in IT and Business Services, Engineering and R&D services and Platforms and products. Overall the business is well diversified across the services delivered and the clients served. Still getting a new client in a $ 50+ million category is difficult as there are many other global players in the Industry.
The industry is such that market dominance is achieved by technical know-how, technological collaborations and workforce. The company has strategic partnerships with some global giants like Google, IBM, Cisco, HP, Microsoft and Dell. HCL recently closed the $1.8 billion acquisition of IBM products for security, marketing, commerce and digital solution. They also launched HCL Software, a new business unit that provides modernized software to businesses to help them in their digital transformation. The company also managed to bag 53 transformational deals in FY 2020. Overall the company has the manpower, technical expertise and digital infrastructure to execute large scale IT projects across the world. The industry, however, has some companies which have more resources and infrastructure at disposal. From here, we go ahead with HCL Technologies Valuation and Intrinsic Value of its shares.
Read more here: HCL Technologies Shares Fundamental Analysis
Discounted cash flow (DCF) is a valuation method used to estimate the value of an investment based on its expected future cash flows. DCF analysis attempts to figure out the value of an investment today, based on projections of how much money it will generate in the future. The following step by step procedure is followed.
- Determining the Revenue Growth Rates
- Forecasting the Financial Statements
- Deriving the FCFF and FCFE
- Calculating the Terminal Value
- Calculating the Discount Rate
- Discounting the Cashflows
- Arriving at the Intrinsic Value of the Shares
You can also get the formula based DCF Excel Model from below:
Step 1: Determining the Revenue Growth Rates
We arrive at the below table by using the past and expected future performance of both the company and the economy. This along with adjustments to changes in the management expectations, extraordinary events and other macro factors give the revenue growth rates for HCL Technologies Valuation.
|Financial Year||Revenue Growth Rate|
Step 2: Forecasting the Financial Statements
The financial statements are forecasted for a period of 5 years using the annual report data of the company. The assumptions used for forecasting are tabulated below. The Excel model is completely editable and can be adjusted for specific changes which may happen over a period of time.
Step 3: Deriving the FCFF and FCFE
Free cash flow to the firm (FCFF) represents the amount of cash flow from operations available for distribution after accounting for depreciation expenses, taxes, working capital, and investments. FCFF is a measurement of a company’s profitability after all expenses and reinvestments. It is given as follows.
Free cash flow to equity (FCFE) is a measure of how much cash is available to the equity shareholders of a company after all expenses, reinvestment, and debt are paid. FCFE is a measure of equity capital usage.
|F/S Items (INR Millions)||Mar-20||Mar-21||Mar-22||Mar-23||Mar-24|
|Free Cash Flow to Firm||126500||157459||175433||199854||224788|
|Free Cash Flow to Equity||70323||81628||86339||102619||114092|
Step 4: Calculating the Terminal Value
Terminal value (TV) is the value of a business or project beyond the forecast period when future cash flows can be estimated. It assumes that a business will grow at a set growth rate forever after the forecast period. Terminal value often comprises a large percentage of the total assessed value.
|Terminal Value Calculation||Units INR Millions|
|Free Cash Flow to Firm||224788.19|
|Cost of Capital||11.34%|
Step 5: Calculating the Discount Rate
DCF analysis helps assess the viability of a project or investment by calculating the present value of expected future cash flows using a discount rate. Here we use the Weighted average cost of capital (WACC) to discount the cash flow. The below table from the excel model shows the calculation of WACC for HCL Technologies Valuation.
Step 6: Discounting the Cashflows
The WACC and the Cost of Equity for the company calculated in the above step are then used to discount the FCFF, FCFE and Terminal Value calculated in Step 3 and 4. In our case, we’ll only consider the FCFF based Intrinsic price of the shares as it represents the cash flow to all the suppliers of capital and not only to the equity shareholders. Thus we arrive at Present value of future FCFF for HCL Technologies Valuation. (Units are INR Millions)
Step 7: Arriving at the Intrinsic Value of the Shares
Dividing the PV of the FCFF and Terminal Value (the Value of the entire firm) by the number of outstanding shares we get the per share intrinsic value. We can compare this price with the current market price of the stock to get the Discount or Premium to its intrinsic price.
|HCL Technologies Valuation||Units|
|PV in INR Million||2488908|
|No of Shares Outstanding (In Million)||2751|
|Current Market Price of Share||926|
HCL Technologies Valuation and Intrinsic Share Price = INR 904.73
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(Note: All the research done by me is only for educational purposes and should not be seen as Investment recommendations. I am a Research analyst and not a SEBI registered Investment Advisor. My research completely reflects my personal opinions and not of my employers. Kindly do your own due diligence before Investing)