Buy HCL Technologies; target of Rs 796: Aditya Birla Money

Aditya Birla Money is bullish on HCL Technologies and has recommended buy rating on the stock with a target of Rs 796 in its February 5, 2013 research report.
 
“HCL Tech registered an impressive revenue growth 3.6% QoQ to $1154.3 mn from $1113.8 mn and a 13% YoY growth from $1021.9 mn. In rupee terms, it registered a growth of 3.0% QoQ to Rs62.74 bn from Rs60.91 bn. It clocked a volume growth 3% for software services. On service wise, Run The Business (RTB) continued to lead the growth (IMS 10.7% QoQ growth), whereas Change The Business (CTB) remained soft. On industry basis, Financial services led the pack (11%), followed by emerging verticals (Energy 5.1%, Media 3.6% & Life science 2.8%) and Telecom continued to remain soft. On geographical mix, Europe (5.9%) and US (3.5%) grew the most (QoQ $ terms). EBITDA increased by 4.9% to Rs 14.16 bn. Improved efficiencies & better cost management helped them to offset partial salary hike (91 bps), which reflected in 40 bps improvement in margin to 22.58% (QoQ). On YoY, EBITDA increased by 46%. PAT improved by 9.0% to Rs9.64 bn from Rs 8.85 bn (QoQ) and 68.5% growth on YoY basis.”
 
“HCL Tech had another strong quarter of order wins worth TCV of $1 bn, from 12 large deals majorly from US and Europe region. Importantly, 80% of the deals have coming from Fortune 500/2000 corporations. HCL Tech continued to remain in Top service providers list in TPI index across all regions and segments, especially in RTB space like ITO and BPO space. Even though, the management commented about sense of discretionary spending coming back in the near future, but we believe that HCL’s strong ITO capabilities and restructured BPO segment would attract more renewals contracts in the next 6 to12 months. The results were in-line with estimates on revenue terms and surprised on margin and PAT front. Management continued to paint an optimist picture, thanks to healthy order wins. Mr. Anand Gupta evolved to the CEO post (who is the brainchild of HCL’s ITO business) and Mr. Vineet Nayar will leave the helm on a high note. We revise our earnings upwards by 12.2% and 6.4% for FY13E and FY14E to factor in the better than expected execution capabilities.”
 
“Currently, HCL trades at a consolidated P/E of 12.8x and 11.7x on its FY13E and FY14E earnings of Rs53.3 and Rs 58.2 respectively. We reiterate our positive view on HCL based upon a) industry leading growth (CAGR of 26% FY09-12), b) strong revenue visibility ($1 bn worth deal) & upcoming restructuring deals in next 12 months, c) stable operating margin (improved from 16.3% in Q1FY11 to 22.6% in Q2FY13) and d) healthy free cash flow position & cash conversion ratio. These above mentioned factors would help HCL Tech to trade close to some of its larger peers in the medium term and we upgrade and value HCL at 13x on its one-year forward earnings with revised target price of Rs796 and reiterate our Buy rating,” says Aditya Birla Money research report.

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