Jul 26, 2012, 01.28 PM IST

HCL Tech remains top pick with target of Rs 630: Nomura

Ashwin Mehta, IT Analyst at Nomura India said HCL Tech remains their top pick with a target price of Rs 630 per share. According to him, client mining has showed positive progression in Q1.

Ashwin Mehta, IT Analyst ,Nomura

Expertise : Equity - Fundamental

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HCL Tech , the country's fourth largest software services exporter reported a rise of net profit by 41.6% quarter-on-quarter to Rs 854 crore in the quarter ended June 2012. The company's dollar revenues went up 3% to USD 1,079.6 million from USD 1047.9 YoY. In rupee terms, the revenues grew 13.5% to Rs 5,919 crore in the fourth quarter of FY12.

Ashwin Mehta, IT Analyst at Nomura India said HCL Tech remains their top pick with a target price of Rs 630 per share. According to him, client mining has showed positive progression in the last quarter and if it can sustain investor concerns, there could be further rerating of the stock.

Here is the edited transcript of the interview on CNBC-TV18.

Q: How much more can valuation support on the way up for HCL Technologies after yesterday's strong numbers?

A: HCL Tech has been our top pick within the sector. Our target price on the stock is Rs 630. Assuming that no major rerating of the stock happens, multiples are around 13 times FY14 earnings. That gives 23% upside from current levels.

I think one key parameter to watch there is client mining. It has shown a positive progression in this quarter and if it sustains some of the investor concerns which have been there in terms of either revenue outperformance or margin sustainability or cash conversion, it will fade and that could lead to further rerating in our view.

Also read: HCL Tech Q4 profit rises over 42%; FX loss at $10.5m

HCL Tech will reach out for new deals by Oct-Nov

Q: What are you assuming in terms of valuations at that price target that you just setout?

A: We value it around 13 times on FY14 earnings. In terms of our earnings expectations we expect around 18% CAGR in the stock over the next two years.

Q: Do you think it's possible that HCL Tech might continue to trade at a bit of a premium to Infosys and Wipro, just like it is doing today?

A: I think from a sustainable perspective, for it to trade at a premium to Infosys and Wipro it needs to replicate the excess which Infosys and TCS have shown in the past on client mining.

In that scenario, you would see sustainable revenue outperformance and if margin predictability sustains, you could have a replication of the Cognizant scenario here. Cognizant traded a 15-20% premium to Infosys despite a lower margin but, for higher growth and predictable margin.

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