HCL Tech best performing IT stock; target Rs 900: Sharekhan

Moneycontrol Bureau

Broking firm Sharekhan has put out a target of Rs 900 on software firm HCL Technologies, calling it "the best performing stock among the IT pack with an annual return of close to 60 percent".

"We remain positive on HCL Tech's earnings predictability over FY2014 and FY2015 driven by the strong momentum in its infrastructure management services (IMS) vertical and its own success in the re-bid market," the broking firm said in its report dated June 18. 

Interestingly, HCL Tech has not yet shown any benefits of the rupee depreciation in its margins. Traditionally, for every 1 percent fall in the rupee the EBIT margin would improve by 30-40 basis points. However, in the last seven quarters the rupee has depreciated by 16 percent whereas the EBIT margin of the top four IT companies except HCL Tech has not shown any improvement.

Sharekhan believes the IT major is ploughing back currency gains into the business to strengthen the front-end (higher S&M cost), to pass on some benefits to clients (in terms of pricing discounts) and to hire a higher number of laterals to execute projects.

"Going forward, even in a scenario of a depreciating rupee, we may not see a secular improvement in the margin profile of the top four in the coming quarter. Nevertheless, given the higher sensitivity of HCL Tech's margin to the rupee's depreciation in the last seven quarters (gains re-invested into the business vs margin improvement), we expect a further improvement in the margin of HCL Tech in the coming quarters, if the rupee stays around the 57-58-a-dollar levels," it said in its report.

At 11:34 hrs HCL Technologies was quoting at Rs 780.60, up Rs 1.90, or 0.24 percent.