Accumulate HCL Tech; target of Rs 750: Prabhudas Lilladher

Prabhudas Lilladher is bullish on HCL Technologies and has recommended accumulate rating on the stock with a target of Rs 750 in its January 17, 2013 research report.
 
“HCL Technologies (HCLT) reported stronger-than-expected revenue and operating margin performance. This is eighth consecutive quarter positive margin surprise. The management remains confident about the margins. Decelerating client addition and stretched margin levers are the key reasons for our cautious stance. We revise our estimates for higher revenue growth and margin, hence, raise TP to Rs750 (Rs660).”
 
“HCLT reported constant currency growth of 3.1% QoQ (PLe: 2.5%). EBITDA margin expanded by 40bp (Cons.: ~160bp erosion) at 22.6%, despite wage hike (-93bps), offsetted by tailwinds from utilization (+63bps), G&A (+33bp) and other efficiencies (+42bps). Overall volume growth of 3% QoQ (IT Svc.: 0.4%) was largely in-line with expectation. HCLT has beaten consensus margin expectation for eight quarters in succession. The company has curtailed SG&A over the last 10 quarters by 220bp to 13.2% (of revenue), one of the lowest ever. The company has successfully curtailed G&A to beat the margin expectation, but, a strict control on S&M could stifle the growth. Moreover, offshore utilization has reached to the highest level since Q3FY10 and onsite utilization is the highest level ever. In order to drive the margin expansion, the company has put a strict control on all the investments. We see stretched margin levers as a concern and investment in business for growth a compulsion.”
 
“Strong growth for TCS and Infosys along with HCL Tech in IMS indicates intensifying competition. IMS contributes ~28% of revenue for HCL Tech and has been contributing ~2/3rd of incremental revenue. However, Infosys, TCS and Wipro are also eyeing for the similar contracts where HCL Tech had free run in FY09-12. We expect HCLT to momentum to moderate in CY13 along with margin pressure due to investment in the business. We retain our cautious stance with .Accumulate. rating, with a TP of Rs750, 13x FY14e earnings estimates,” says Prabhudas Lilladher research report.

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