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Apr 22, 2013, 11.09 AM IST | Source: Moneycontrol.com

Hold HCL Technologies: Ventura Securities

Ventura Securities has recommended hold rating on HCL Technologies, in its April 18, 2013 research report. According to the research firm, a slight moderation in margins is expected as the company seems to have maximized efficiency and thrust on onshoring and addition to head count, could dampen this further.

Ventura Securities has recommended hold rating on HCL Technologies , in its April 18, 2013 research report. According to the research firm, a slight moderation in margins is expected as the company seems to have maximized efficiency and thrust on onshoring and addition to head count, could dampen this further.

The Q3FY13 earnings of HCL Tech were much ahead of street expectations. The topline of Rs 6,425 crore for Q3FY13 was up 2.4 percent QoQ while net income grew by a robust 7.8 percent QoQ to Rs 1,040 crore. EBIT margins were maintained at 19.9 percent (+10 bps).

Going forward we expect a slight moderation in margins as the company seems to have maximized efficiency and thrust on onshoring and addition to head count, could dampen this further. Further, in case the pricing pressure plays out then that could leave an adverse impact on the margins. At a CMP of Rs 736, the stock is trading at 12.8x and 11.5x, its estimated earnings for FY14E and FY15E. We recommend a HOLD on the stock.

Key Takeaways

HCL Tech posted a better than expected topline of Rs 6,425 crore for Q3FY13 (2.4 percent QoQ) and its net income grew by a robust 7.8 percent QoQ to Rs 1,040 crore. On constant currency basis, revenues for the current quarter grew by 3.8 percent sequentially to USD 1,198 mn. EBIT margins increased marginally by 10 bps sequentially to 19.9 percent due to its ramped up deals in FY12.

On the service segment, engineering services contributed 17.1 percent to the revenue while infrastructure growing at 9 percent, emerged as the star contributor with 29.9 percent contribution to Q3FY13 revenue. EAS at 4.4 percent QoQ, at constant currency terms was another vertical that performed well.

Europe was the strongest geography at 6.3 percent QoQ growth followed by US at 3.6 percent and ROW at 0.1 percent constant currency terms. US contributed 57.1 percent  whereas Europe contributed 28.9 percent to the revenues of the company in Q3FY13.

On the industrial front, manufacturing contributed 28.4 percent to the revenues in Q3FY13 followed by financial services at 25 percent. Public services reported healthy growth rate at 14.8 percent QoQ in Q3FY13 in constant currency terms

During the current quarter HCL Tech has won multi-year transformational deals with a total contract value over $ 1 billion, including the multi-year infrastructure management services contract from US-based automaker Ford Motor Company for $ 100 million.

Consistent client addition momentum continued in this quarter as well, with 37 new clients being added in the current quarter taking the total client count to 547 against 544 QoQ. However there is a clear visible trend of new client additions decreasing sequentially.

The total employee count declined by 791 employees QoQ to 84,403 in Q3FY13 despite gross addition of 5,146 employees. Net employees in IT services reduced by 1,000, while the BPO headcount rose by 209. Attrition rates for IT services rose by 60 bps QoQ to 14.2 percent in Q3FY13 while attrition for BPO was down by 80 bps to 7.5 percent.

Utilization rate on blended basis improved by 190 bps quarterly to 83.8 percent due to reduction in head count. Utilization (excluding trainees) was up 240 bps at 80 percent and including trainees it was up 340 bps to 79 percent, both at a lifetime high," says Ventura Securities research report.

Public holding more than 90% in Indian cos

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