Buy HCL Tech; target of Rs 494: KRChoksey

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Buy HCL Tech; target of Rs 494: KRChoksey

KRChoksey is bullish on HCL Tech and has recommended buy rating on the stock with a target of Rs 494 in its January 17, 2012 research report.

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KRChoksey is bullish on HCL Tech and has recommended buy rating on the stock with a target of Rs 494 in its January 17, 2012 research report.

"HCL Tech, growth in revenue and EBITDA was in line with our expectation; however higher than estimated forex losses led lower than expected net profit. The positive surprise came at two front i.e. overall deal closure (18 large deals signed in this quarter with total contract value of USD1 billion) and improvement in ratio of cash flow from operation to net profit from 24% in Q1FY12 to 119% in Q2FY12. The management maintained its stance that deals win will continue to be led by vendors churn especially in case of long term deals being executed by incumbents and the same coming up for renewal. Whereas, they were hawkish in respect of discretionary spends primarily due to increase in sales cycle period and delay in project ramp-up by the clients. Considering the company's relatively strong positioning in "Run the Business" segment, we expect the company to report relatively higher volume growth in near term compared to peer sets."

"In case of IT services volume grew by 4.9% QoQ in Q2FY12 better than our expectation and higher than peer sets -for instance TCS and Infosys registered volume growth of 3.2% and 3.1%, respectively, on QoQ basis in December quarter. Whereas, Infrastructure services (IMS) registered 0.7% QoQ decline in constant currency basis primarily due to temporary stoppage of work in System Integration business in India (the same is reflected in decline in India's share in total revenue from around 5% in Q1FY12 to around 3.5% in Q2FY12) because of significant depreciation in INR against the major global currencies leading to significant losses to the company .In the above mentioned contracts, the company is currently in re-negotiation process with both vendors and customers and expects the same to complete in Q3FY12."

"EBITDA margin improved by 141 bps QoQ to 18.5% (in INR terms) in Q2FY12 against our expectation of improvement in margins by 166 bps QoQ primarily led by higher than projected losses in BPO segment. The improvement in EBITDA margin was primarily led by INR depreciation against the major global currencies which supported margins by 260 bps QoQ; whereas annual salary increment, SG&A investment and milestone based bonus payment adversely impacted margin by 104 bps QoQ in Q2FY12.  The company reported forex losses of Rs.76 crore in Q2FY12 against our projection of Rs.9 crore. Higher than estimated forex loss led lower than expected net profit of Rs.573 crore in Q2FY12 against our forecast of Rs.630 crore."

"Considering, huge deal win in the recent quarters; we believe the company will continue to outperform peer sets in terms of volume growth in the coming quarters. Taking the same into account we recommend 'BUY' on the stock with a price target of Rs. 494 by assigning multiple of 13.5 times (i.e. 25% discount to TCS's target P/E multiple) to its FY13E EPS of Rs. 36.6," says KRChoksey research report.  

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To read the full report click on the attachment