Buy HCL Tech, target Rs 400: ICICI Sec

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ICICI Securities is bullish on HCL Technologies and has maintained buy rating on the stock with target price of Rs 400.

 

ICICI Securities research report on HCL Technologies

 

Key takeaways from HCL Technologies

 

(HCL Tech) annual analyst meet held at Mumbai are: i) demand environment continues to be robust, with the company being more confident on the demand front compared with a year ago, ii) HCL Tech's strategy - 'focus, lead and dominate' - is facilitating it to enter large transformational deals. The company has built a strong pipeline for such large deals, iii) increased diversifications in overall offerings, with engineering services, infrastructure management services and BPO witnessing improved traction, iv) innovative pricing models such as outcome-based, output-based and device-based pricing to provide non-linearity to the business models, and v) synergistic acquisitions to supplement organic growth. As per Q4FY07 results release, HCL Tech's management is confident of attaining dollar denominated revenue CAGR of 30% in the next three years. The company has increased forward cover to USD 1.73billion (cover for the next eight quarters) to hedge against rupee appreciation. Reiterate BUY.

 

Demand environment continues to be robust.

 

The management is more confident on the demand front as compared with a year ago. HCL Tech is currently conducting a customer survey to fathom the impact of a US slowdown, if any, on their IT budgets. Though the final verdict is awaited, clients' initial response is that they would require more time to appropriately respond to such a situation. 

 

Strong pipeline for large transformational deals.

 

With even more established service lines in infrastructure management services and BPO, HCL Tech has been able to participate and win full outsourcing transformational deals. The management has indicated a strong pipeline for such large 'multi-million dollar, multi-year, multiservice delivery' contracts. 

 

Innovative pricing models to provide non-linearity.

 

HCL tech is gradually moving towards innovative pricing models such as product-based royalty, guaranteed percentage of savings on IT cost, device-based pricing etc. Clients such as Boeing, Johnson & Johnson, SAP and Cisco have adopted such pricing models. The company expects substantial additions in its client base as regards adopting such pricing models, thus providing the much-needed non linearity to the business mode.

 

Synergistic acquisitions.

 

HCL Tech believes acquisitions to play an important role in the company's growth strategy. Acquisitions are required to be strategic and synergistic in nature i.e., gain access to competence and domain skills and explore newer geographies.

 

I-SEC view.

 

We are impressed with the recent traction in HCL Tech's business owing to expansion of its services portfolio, client-mining ability and increasing wins in new business. With critical size in each of its business segments and a track record of winning larger number of large deals, we believe that HCL Tech's revenue visibility has improved significantly. The stock is trading at 15.0x FY08E and 12.4x FY09E EPS estimates (after ESOP charges), which appears attractive. Given improved revenue visibility ahead, we maintain BUY with a price target of Rs400, based on 18x FY09E EPS.