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Analysts raise HCL Tech's margin estimates after strong Q1

Several analysts have raised their full year margin expectations on HCL Technologies, after the software services exporter surprised the street with better-than-expected net profit and margin expansion despite wage hikes in the first quarter.

October 18, 2012 / 03:13 PM IST
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Moneycontrol Bureau

Several analysts have raised their full year margin expectations on HCL Technologies, after the software services exporter surprised the street with better-than-expected net profit helped by large deal wins and margin expansion despite wage hikes in the first quarter.

HCL Tech's 78% year-on-year rise in July-Sep quarter net profit at Rs 885 crore (analysts expectation of Rs 788 crore) and EBITDA margin up to 22.2% from 22% in Q4 and 17.1% a year ago (analysts expectation of 200-250 bps sequential fall) was in stark contrast to rival Infosys, which just about met street expectations in its second quarter and also cut its full year earnings per share expectations much more than was expected.

Nomura Financial Advisory and Securities India has raised its EBITDA margin forecast on HCL Tech by 140 bps for FY13 and FY14 to 20.4% and 19% respectively. Others like Nirmal Bang, Antique Stock Broking among have also raised their margin estimates by 150-180 bps.

Some analysts, however, did flag the company's revenue miss in the quarter, saying it reflected the overall slowdown the sector was facing.

Here are select comments from brokerages:

ANGEL BROKING: HCL Tech is strongly positioned in the EAS and IMS verticals, which places it well for short-term as well as long-term growth. HCL Tech has displayed an industry-leading growth trajectory and is clearly proving out to be one of the major beneficiaries in the vendor consolidation exercise going on in the industry. We continue to be positive on the stock.

ANTIQUE: While we raise our margin assumptions by 180 bps for FY13 and FY14 to factor Q1 beat, we believe current margin levels are unlikely to sustain. See head winds from wage hike due for non billable employees, rupee appreciation and investment in SG&A. Utilization (ex trainees) at 81.4% is at near peak levels and provides limited room for upside. Rating: Hold. Target: Rs 620.

BARCLAYS: Despite falling short on revenue growth, these are strong results yet again, especially when peers have struggled to manage growth and profitability. The results are another step in cementing HCL Tech's position within the larger IT services peers group due to consistent growth and improving profitability. Rating: Overweight.

CREDIT SUISSE: HCL Tech remains our top pick as continuing deal wins should drive attractive revenue growth, low-margin base should support margin sustainability and valuations are attractive at 11 times FY14 earnings.

KOTAK INSTITUTIONAL: HCL Tech's modest revenue growth once again reaffirms our thesis of slowdown and fragmentation. EBIDTA margin increase was surprising, noting compensation revision, lower pricing and growth driven by traditionally lower-margin infrastructure management and BPO services. (But) Margin performance is not sustainable and faces risk from pricing pressure and cost inflation due to industry-wide slowdown. Rating: Reduce. Target: Rs 575.

NIRMAL BANG: It should be noted that the IMS business has grown faster than the company average for seven out of the past eight quarters, clearly reflecting the fact that this has been the segment that has driven HCL Tech above-peer revenue growth.  Enterprise application services, down 1.9% sequentially is a clear sign that discretionary spending remains
under stress; in view of the challenging economic environment, a rebound appears unlikely any time soon. Rating: Hold. Target: Rs 647.

NOMURA: We remain confident on HCL Tech's re-rating story as we expect it to win significant deal flow over next two quarters from rebids (addressable market of USD18 billion); have greater comfort on a higher margin trajectory versus earlier expectations; and see continued positive progression on client mining. Rating: Buy. Target: Rs 700.

HCL Tech shares were up 1.7% at Rs 590.40 on NSE in morning trade on Thursday.

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