Buy HCL Tech; target of Rs 512: Aditya Birla Money

“HCL Tech posted a healthy topline growth of 12.8% to Rs 52.45 bn from Rs 46.51 bn on sequential basis and an increase of 34.9% from Rs 38.88 bn on YoY basis. It posted an impressive volume growth of 4.9% (software services) and $ term growth of 2%. On service basis, the strong growth in Enterprise Application Services (EAS 4.5%), Engg & R&D services (ER&D 3.6%) and Custom Applications (3.2%). Infrastructure management services contracted by 3%, due to the going slow on Indian project and BPO remained flat (in $ terms). On industry wise, Healhtcare (15.4%) and Retail (5.6%) led the show. On geographical mix, developed nations such as US and Europe expanded by 7.4% & 2.7% respectively (in $ terms, QoQ). EBITDA improved by 22% to Rs9.7 bn from Rs7.9 bn (QoQ) and margin improved by 141 bps to 18.5%, largely driven by favourable rupee of 260 bps. PAT increased by 15.2% to Rs5.72 bn from Rs 4.96 bn (QoQ) and 43.3% growth on YoY basis.”

“HCL Tech remained aggressive on employee additions (7804 gross/2556 net hiring, with 77.1% of gross hiring on lateral), taking the total employee base to 83076. HCL’s well-proven strategy of firstly, gaining market share got reflected in a yet another quarter of strong client addition (57 clients added), taking the active client relationship to 516 clients and client mining increase in number of clients by 9, 5, 5,1 and 2 in $5 mn, $10 mn, $20 mn, $40 mn & $100mn respectively. Top client grew by 5.3%. Interestingly, HCL signed 18 new deals with Total Contract Value (TCV) exceeding $1 bn, reconfirms our conviction on the company’s strategy. We believe that, HCL would extract more out of the current unfavourable and somewhat similar environment, with its proven strategy placing itself once again in the sweet spot. In recent TPI report, HCL has been recognised among Top 6 vendors across all regions in terms of deal won in CY11. More importantly, the restructured deal flow is expected to remain strong in CY12 as well. HCL Tech is well positioned to capitalise the near term deal flows. This provides comfort on HCL’s deal pipeline for FY13E.”

“We believe that recent price underperformance to IT index provides an investor an opportunity to enter, as it is one of the industry’s leading revenue generator - HCL Tech being one of the few potential Indian IT players in the top league to win upcoming large restructuring deals. Industry leading growth, improving operating margin (which is key concern for the investors) and comfortable free cash flow generation would help HCL to reduce the valuation gap with large peers in the medium term. Currently, HCL trades at a consolidated P/E of 12.5x and 10.7x on its FY12E and FY13E earnings of Rs33.6 and Rs39.4 respectively. We remained positive and continue to value HCL (20% discount to the current Infosys & TCS valuation) at 13x on FY13E earnings of Rs 39.4. we upgrade our rating from Accumulate to Buy with a revised target price of Rs 512.2,” says Aditya Birla Money research report.        

Institutional holding more than 40% in Indian cos

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