Buy HCL Tech; target of Rs 532: KRChoksey

KRChoksey is bullish on HCL Tech and has recommended buy rating on the stock with a target of Rs 532 in its April 19, 2012 research report.

“HCL Tech, strong traction in terms of deal win continues in Q3 FY12 primarily led by run-the-segment. The company signed around $2.5 billion deals (excluding contract renewal) in the last 6 months of which around $1 billion is signed in Infrastructure Management space (IMS). The large deals win in IMS indicates that the clients are reducing the cost in run-the-business by offshoring the same and transferring the saving in pursuing change-the-business projects especially ones which are offering high ROI in short term itself. We believe, Indian IT companies (such as HCL Tech and TCS) which are offering strong value proposition in run-the-business space in the current environment (i.e. flat to negative IT budgets) will continue to outperform industry’s average growth rate in near term. Considering the company’s relatively strong positioning in “Run the Business” segment, we expect the company to report relatively higher volume growth in near term compared to peer sets and hence we upgrade our recommendation on the stock to “ACCUMULATE” from “HOLD”.”

“Revenue in constant currency terms grew by 1.9% QoQ in Q3 FY12 in line with our expectation. In case of IT services volume grew by 2.9% QoQ in Q3FY12; whereas blended billing rate declined by 1.4% QoQ due to decline in onsite revenue mix by 170 bps QoQ to 56.2% in Q3 FY12. IMS and BPO registered strong growth i.e. 5.1% and 6.5%, respectively, QoQ supported by ramp-up of the deals signed in the last quarter. The management commented that in the coming quarters the growth will continue to be led by run-the-business on back of the large deal wins in recent quarters. Whereas, discretionary projects continues to be under greater scrutiny by clients and projects only which offers high ROI in short term are being under taken by the clients and hence discretionary spend will continue to be volatile in near term.”

“BITDA margin declined by 12 bps QoQ to 18.4% (in INR terms) in Q3FY12 against our expectation of decline in margins by 58 bps QoQ primarily led by higher than projected improvement in margins of BPO segment. The company reported forex losses of $7.3 million in Q3FY12 against our projection of $11.8 million. Lower than estimated forex loss led higher than expected net profit of Rs.581.9 crore in Q3FY12 against our forecast of Rs.562.9 crore. Considering, huge deal win in the recent quarters; we believe the company will continue to outperform peer sets in terms of volume growth in the coming quarters. Taking the same into account we recommend ‘ACCUMULATE’ on the stock with a price target of Rs. 532 by assigning multiple of 14 times (i.e. around 25% discount to TCS’s target P/E multiple) to its FY13E EPS of Rs. 38,” says KRChoksey research report. 

Institutional holding more than 40% in Indian cos

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