Buy HCL Technologies; target Rs 584: BP Equities
BP Equities is bullish on HCL Technologies and has recommended buy rating on the stock with a target price of Rs 584 in its April 20, 2012 research report.
April 21, 2012 / 16:02 IST
BP Equities is bullish on HCL Technologies and has recommended buy rating on the stock with a target price of Rs 584 in its April 20, 2012 research report.
“HCL Technologies posted excellent set of numbers for Q3 FY12, coming more or less in line with ours while above street’s expectations. The company’s top line grew 26.0% Y-o-Y but declined marginally by 0.6% Q-o-Q to Rs 52.15 bn coming a bit lower than with our estimate of Rs 53.19 bn, on account of INR appreciation by 3% in the quarter. Net profits grew 2.5% Q-o-Q and 28.7% Y-o-Y to Rs 6.03 bn ahead of our estimate of Rs 5.89 bn due to higher other income. HCL Tech revenue in US$ terms grew 2.5% Q-o-Q and 14.6% Y-o-Y to US$ 1,047.9 mn, aided by 2.9% sequential growth in volumes, 180bps expansion in blended utilization and stable pricing. Volumes growth were above expectations (2.9% in the quarter) as compared to 0.9% de growth registered by Infosys, we expect volumes growth to remain strong for the AMJ’12 quarter. Total contract wins stood at US$1.5 bn in the quarter (highest ever) and $2.5 bn for the last six months, which gives robust revenue visibility. 70% of the contract booking were from new clients and $201 bn from fortune 500 clients. EBITDA margins declined only 11 bps Q-o-Q to 18.4% (coming more than our expectation of 17.9%), despite INR appreciation of 3% in the quarter offset by sharp increase in utilization rate and high off shoring. Forex loss of Rs 363 mn (as per expectations) and higher other income resulted in NPM expansion of 64 bps Q-o-Q and 24 bps Y-o-Y to 11.6%. Diluted EPS grew 28.5% Y-o-Y and 4.9% Q-o-Q to Rs 8.6 in line with our estimate of Rs 8.5”“HCL tech won contracts worth US$1.5 bn in the quarter, which is the highest ever booking for a quarter. The total deal pipeline stands at US$2.5 bn which provides robust revenue visibility going forward. 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 6 months. Out of the total wins 70% bookings were from new client accounts, 88% from from fortune 500 clients and major deal wins in BFSI and manufacturing vertical. Client mining remained strong with three new $100mn client added in the last 9M and total 52 new clients added in the quarter.”“Manufacturing and BFSI revenue contribution declined 50,130 bps sequentially to 29.0% and 24.0% respectively. However BFSI and Manufacturing registered strong bookings of $1 bn and $600 mn which we believe will fuel growth going forward. Telecom registered growth of 6.9% Q-o-Q in US$ revenues and contribution increased 60 bps to 8.6%, first time in the last six quarters. IMS vertical which de grew in the last quarter recovered strongly (revenue up 5.2% q-o-q in US$ term and contribution expanded 60 bps q-o-q to 24.0) in the quarter due to resumption of India business. Enterprise Application services grew 4.6% q-o-q in US$ term indicating continued RTB deal flow. Europe & Asia Pacific revenue contribution expanded 80 bps & 130 bps to 27.6% and 15.7% respectively, while America contribution contracted 210 bps to 56.7%, primarily due to slow down in India BFSI business.”“We expect the company to grow 27.9% and 17.6% Y-o-Y to Rs 205.1 bn and Rs 241.3 bn in FY12E and FY13E respectively. HCL Tech trades at a FY12E and FY13E P/E of 15.4x and 12.8x which is still lowest amongst tier-1 peers, in fact the valuation gap between HCL Tech and Infosys has narrowed down significant in the quarter. We believe that HCL Tech still trades at a pretty attractive valuation considering its strong deal pipeline, significant client addition and robust revenue visibility going forward. We maintain our “BUY” rating on the stock with a price target of Rs 584 (upside of 15.6%) ~15x FY13E earnings,” says BP Equities research report.Shares held by Mutual Funds/UTI Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.To read the full report click on the attachment 
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