Buy HCL Tech; target of Rs 505: BP Equities

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Buy HCL Tech; target of Rs 505: BP Equities

BP Equities is bullish on HCL Tech and has recommended buy rating on the stock with a target of Rs 505 in its January 18, 2012 research report.

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BP Equities is bullish on HCL Tech and has recommended buy rating on the stock with a target of Rs 505 in its January 18, 2012 research report.

"HCL Tech posted excellent set of numbers for Q2 FY12, coming in line with ours while above street's expectations. The company's top line grew 12.8% Q-o-Q and 34.9% Y-o-Y to Rs 52.45 bn coming in line with our estimate of Rs 52.24 bn, on account of volumes growth of 4.6% and INR depreciation by 11%, offset by lower utilization and slowdown in Infrastructure Management Services (IMS) revenue. Net profits grew 15.3% Q-o-Q and 43.3% Y-o-Y to Rs 5.72 bn inline with our of Rs 5.78 bn. Volumes growth were above expectations (4.6% in the quarter) as compared to 3.1% growth registered by Infosys, in fact we expected volumes growth to remain strong for the OND'11 quarter. Pricing remained more or less stable in the quarter, going forward we don't see any significant pricing pressure from clients. EBITDA margins expanded 141 bps Q-o-Q to 18.5% (coming exactly in line with our expectation of 18.5%), on account of significant INR depreciation (contributed 260 bps) offset by investment in SG&A and one-time milestone payment to employees which had a negative impact of 104 bps."

"Forex loss stood at Rs 758 mn (as per expectations) and NPM expanded 24bps Q-o-Q and 64 bps Q-o-Q to 10.9% in the quarter. HCL Tech revenue in US$ terms grew 2.0% Q-o-Q and 18.3% Y-o-Y to US$ 1022.0 mn, aided by 4.6% sequential growth in volumes offset by cross currency aberrations (-ve 1.7% impact). Volumes growth remained strong in the quarter while $ revenues growth was a bit below expectation. Diluted EPS grew 42.8% Y-o-Y and 14.5% Q-o-Q to Rs 8.2 in line with our estimate of Rs 8.3"

"Manufacturing, Healthcare and BFSI revenue contribution expanded 50,100 and 20 bps sequentially to 29.5%, 8.6% and 25.3% respectively, 82% of the total deal wins in the quarter were from these verticals, going forward we expect these key verticals to deliver strong growth. Retail grew 16.7% Q-o-Q and contributed 8.8% in the quarter while Telecom once again remained sluggish, registered a growth of just 6.1% Q-o-Q in revenues and contribution dropping 50 bps to 8.5%. IMS degrew 3.0% Q-o-Q while Engg. & R&D and Enterprise Application services grew 3.6% and 4.5% Q-o-Q indicating continued RTB deals flow. IMS slowdown was primarily due to softness in the India System Integration business in public services space. US & Europe revenue contribution expanded 300 bps & 20 bps to 58.8% and 26.8% respectively, while Asia pacific contribution contracted 310 bps to 14.4%, primarily due to slow down in India IMS business."

"We expect the company to grow 31.0% and 17.5% Y-o-Y to Rs 210.0 bn and Rs 246.7 bn in FY12E and FY13E respectively. HCL Tech trades at a FY12E and FY13E P/E of 12.6x and 10.9x which is lowest amongst tier-1 peers (~40% discount) and expect the discount to narrow down gradually. We believe that HCL Tech trades at a pretty attractive valuation considering its strong deal pipeline, significant client addition and robust revenue visibility going forward. We maintain our "BUY" rating on the stock with a price target of Rs 505 (upside of 21.1%) ~13x FY13E earnings," says BP Equities research report.     

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