Hold HCL Tech; target of Rs 430: Emkay

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Hold HCL Tech; target of Rs 430: Emkay

Emkay Global Financial Services has recommended hold rating on HCL Tech with a target of Rs 430, in its January 17, 2012 research report.

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Emkay Global Financial Services has recommended hold rating on HCL Tech with a target of Rs 430, in its January 17, 2012 research report.

"HCLT reported revenues at US$1,022 mn (+2% QoQ,+3.7% in constant currency terms) , tad short on Emkay est with good growth in core IT services business (+3.8% QoQ, +5% QoQ volume growth), however we are negatively surprised by ~3% QoQ decline in the IMS business after the strong growth over the past couple of years. EBITDA mgns improved by ~140 bps QoQ to 18.1% aided largely by currency depreciation entire EBITDA margin improvement driven by gross margin expansion).Profits at Rs 5.5 bn was higher than estimates aided by lower forex losses and lower tax rates (at 25.3% V/s co guidance of ~28%). Growth was good across US (+7.4% QoQ) and Europe (+2.7% QoQ). Amongst verticals, BFSI (+2.8% QoQ) and Manufacturing (+3.7% QoQ) grew higher than co average. Client addition was decent during the quarter with top 5 clients growing by ~5.3% QoQ , Cash generation improved during the quarter with CFO's at US$ 132 mn (70% of qtrly EBITDA) V/s -US$ 25 mn in Sep'11 qtr."

"HCLTech reported that it has won 18 new clients during the quarter with a TCV of US$ 1 bn+ and indicated that it continues to pursue aggressive entry into Fortune 500 clients as clients continue to look for more cost efficient vendors. Co note that it has been able to gain entry into 4 financial services clients in Europe in the recent past. Management indicated that it expects US$ 47 bn worth of business to come up for renewal in CY12 and expects to target vendor churn opportunity of US$ 15 bn within the pie. Management further indicated that while it is seeing good demand from vendor churn/consolidation in the RTB segment, it continued to see softness on the discretionary spending side despite a 4.5% sequential growth in EAS business during the quarter."

"We tweak our FY12/13E earnings lower by 0.8/0.5% respectively to Rs 34/38.5 as we cut our US$ revenue estimates modestly. While valuations at ~12.5x/11x FY12/13E P/E should limit absolute downsides, an upside remains hinged on sustaining superior revenue growth (which has been missing for the past 2 qtrs) and improving margins. Retain HOLD with an unchanged TP of Rs 430," says Emkay Global Financial Services research report.

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