Buy HCL Tech; target of Rs 601: BP Equities

BP Equities is bullish on HCL Technologies and has recommended buy rating on the stock with a target of Rs 601 in its August 1, 2012 reports.

“HCL Tech posted excellent set of numbers for Q4 FY12, coming higher than ours as well as street’s expectations. The company’s top line grew 37.7% Y-o-Y and 13.5% Q-o-Q to Rs 59.19 bn coming higher than with our estimate of Rs 57.8 bn, on account of better pricing and INR depreciation of ~10% in the quarter. Net profits grew 41.8% Q-o-Q and 67.1% Y-o-Y to Rs 8.5 bn ahead of our estimate of Rs 6.88 bn due to improved efficiency and productivity resulting in margins expansion. HCL Tech revenue in US$ terms grew 3.0% Q-o-Q and 12.1% Y-o-Y to US$ 1,079.6 mn, aided by 1.8% sequential growth in volumes, better pricing and high onsite utilization offset ~160 bps due to cross currency aberrations. Volumes growth stood at 1.8% (up 5.7% onsite and 0.5% Offshore) as compared to 2.8%/5.3% growth registered by Infosys and TCS. Offshore volumes growth was muted due to sharp fall in utilization offshore however we expect volumes growth to be better for the JAS’12 quarter.”

“EBITDA margins expanded 359 bps Q-o-Q and 351 Y-o-Y to 22.0% (coming more than our expectation of 19.7%), primarily due to INR depreciation and operational efficiency. Forex loss stood at Rs 576 mn vs loss of Rs 363 mn in the last quarter. NPM expanded 288 bps Q-o-Q and 254 bps Y-o-Y to 14.4%. Diluted EPS grew 67.0% Y-o-Y and 41.8% Q-o-Q to Rs 12.2 ahead of our estimate of Rs 9.8. Management indicated that HCL Tech’s differentiated strategy, focus on winning deals by increasing market share, increased SG&A spend and focusing on vendor churning exercise has helped the company win significant deals in the last 12-18 months. The company has signed eight multi year multi million dollar transformational deals in the last quarter and a total of 52 in FY12, which we believe is pretty healthy as compared to peers. Management is seeing healthy demand environment and eyes on vendor churning exercise to win more contracts. Client mining remained strong with four new $100mn client added in the last 12M and total 50 new clients added in the quarter.”

“We expect the company to grow 20.8% and 11.5% Y-o-Y to Rs 254.0 bn and Rs 283.1 bn in FY13E and FY14E respectively. HCL Tech trades at a FY12E and FY13E P/E of 12.4x and 11.3x which is still lowest amongst tier-1 peers, in fact the valuation gap between HCL Tech and Infosys has narrowed down significant considering its continuous outperformance. We believe that HCL Tech trades at a pretty attractive valuation considering its outperformance, strong deal pipeline, significant client addition and robust revenue visibility going forward. We upgrade our “HOLD” rating on the stock to “BUY” with a price target of Rs 601 (upside of 15.2%) ~14x FY13E earnings,” says BP Equities research report.  

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