Buy HCL Tech; target of Rs 500: Arihant capital markets

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Buy HCL Tech; target of Rs 500: Arihant capital markets

Arihant capital markets is bullish on HCL Tech and has recommended buy rating on the stock with a target of Rs 500 in its January 18, 2012 research report.

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Arihant capital markets is bullish on HCL Tech and has recommended buy rating on the stock with a target of Rs 500 in its January 18, 2012 research report.

"HCL Tech posted their Q2FY12 result which was broadly inline with our expectation. Total revenue came at Rs.5245.2cr-up by 12.8% QoQ , while net profit came at Rs.572.7cr-up by a whopping 15.3% QoQ. In US$ terms, total revenue came at $1022mn (up by 3.7% QoQ). Volume growth was also robust at 4.9% (onsite 5.7%, offshore 4.6%) considering that the December quarter is seasonally weaker. A higher onsite volume growth is an indication of the start of new projects. Pricing however saw a decline of ~1%. The company's bottomline was impacted by a forex loss of Rs.75.8cr due to the sharp rupee depreciation."

"On account of INR depreciation of ~10% during the quarter, HCL margin received a boost of ~260 bps. The management reinvested ~110bps of these benefits into the company in the form of increments, bonuses, partial salary hike, milestone related payouts, etc. Thus, its EBIDTA saw an uptick of only 140 bps QoQ. The company also took in 2556 net employees a majority of which were freshers which brought down the company's utilisation rate by a ~30bps and affected margins. Among its service offerings, it was positively surprising to see Enterprise Application Service posting the strongest growth of 4.8% while Infrastructure posted a negative growth of 2.9% on a sequential basis. The management attributes this to the sharp rupee depreciation which made it unviable to carry on some India-centric projects. They however assure that Infra will come back on the growth path in the coming quarters. The other two service lines namely Engg. And R&D and Custom Application Service posted growth of 3.4% QoQ each."

"HCL's deal signing momentum continued with it winning 18 multi-year multi-million deals during the quarter whose TCV exceeded $1bn. It was further heartening to see HCL increasing its top 5 and top 10 client's revenue by 7.7% and 4.9% respectively. HCL's client mining expertise was evident when it managed to push two of its existing clients to $100mn+ category taking the total to 3. In total, it added 57 new clients in Q2FY12 taking its total client base to 516. The company indicated that it has been able to gain foothold in some of the big Fortune 500 companies on account of vendor consolidation and churning and expects further success on this front. We believe it really can't be denied that HCL might be compromising on pricing front to gain these clients. We however believe that once the tide turns and the global economy picks up, HCL will be able to improve upon its current pricing losses."

"We are upping our estimates on account of factoring in a higher INR/$ rate than we had expected before. However, taking into account a riskier economic scenario and weaker market sentiment, we lower our target multiple to 15x from 16x earlier for our FY12EPS of Rs.33.4 per share. We thus maintain our target price of Rs 500 and maintain a 'BUY' call on the stock," says Arihant capital markets research report. 

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