Accumulate HCL Tech; target of Rs 650: Emkay

“HCLT reported inline rev at US$ 1,113 mn (+3.2% QoQ) with growth led by strong show from IMS (+10% QoQ 80%+ of incremental rev during the qtr) with IT Services rev growth tad soft at ~0.5% QoQ (IT Services vol growth at 2.5%). However the big surprise came from ~20 bps improvement in EBITDA margins at 21.8% (V/s our est of ~100 bps sequential decline) despite wage increments (-80 bps impact) aided by offshore shift (offshore % of rev increased by ~160 bps QoQ to 44.3% and is the highest since Dec’08 levels) and increase in utilization (74.2%, up 180 bps sequentially). Profits at Rs 8,631 mn (+2.6% QoQ) came in higher driven by op performance beat. Amongst verticals, Healthcare and Retail grew by 14%/10% QoQ with Fin Svcs growing by ~4.4% QoQ. Improvement in client metrics continued with no of US$ 20mn/30mn+ clients increasing by 4 to 49/29 respectively.”

“HCL Tech’s strong performance through the past few qtrs (and most importantly through H1FY13) should put to rest a ‘either revenue growth or margins’ thesis that has kept a large section of investors away from owning HCLT. Mgmt noted that it remains confident of sustaining revenue growth within the Top Tier league along with maintaining/improving margins (ex currency) through operational levers like utilization, higher offshore % of revenues and growth leverage. In this context we highlight that HCL Tech has shown commendable improvement in client metrics through recent quarters which lend confidence to our thesis on ‘margin upsides’ for the company. Co noted that it would be refocusing a lot of sales effort in chasing the rebid opportunity (US$ 61 bn worth of deals up for rebid in H2CY12) with it’s recent win ratios of ~50% driving confidence on sustaining rev growth momentum ahead.”

“We raise our FY13/14E EPS by ~8%/4% each to Rs 47.3/49 respectively driven largely by higher margin assumptions to 20.1%/18.9% (V/s 18.8%/18.5% earlier). While sector wide slowdown continues to drive revenue growth trajectory down for HCLT as well, we see HCLT on a stronger footing driven by strong order book and scope to improve margins through improved client mining with recent quarters lending enough confidence to the thesis. Retain ACCUMULATE, TP raised to Rs 650 (V/s Rs 615 earlier),” says Emkay Global Financial Services research report.

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