Accumulate HCL Technologies; target of Rs 653: KRChoksey

KRChoksey is bullish on HCL Technologies and has recommended accumulate rating on the stock with a target of Rs 653 in its October 30, 2012 research report.

“HCL Technologies continued to report stellar performance especially at EBITDA margin front i.e. margins improved by 20 bps QoQ in Q1 FY13 (against our expectation of decline by 100 bps QoQ); despite headwind of wage hike which adversely impacted margin by 80 bps QoQ. Though, we were bit disappointed by slower than expected revenue growth i.e. 2.9% QoQ in constant currency terms versus our estimation of 4% QoQ growth in Q1 FY13, especially taking into account that the company had signed around $2.5 billion deals (excluding contract renewal) in Q2 FY12 and Q3 FY12 and incremental revenue flow from these deals should have reflected in Q1 FY13. However, we believe, the slower growth rate than peer set (TCS’s revenue increased by 4.8% QoQ in constant currency terms) in Q1 FY13 is an aberration and will register leading revenue growth in coming quarters supported by ramp-up of the recently signed deals.”

“Revenue in constant currency (CC) terms grew by 2.9% QoQ in Q1 FY13 versus our expectation of 4% QoQ growth. Lower than expected revenue growth was primarily due to decline in revenue from ERP segment by 2% QoQ (in CC); whereas infrastructure management services (IMS) and BPO registered strong growth i.e. 10.3% and 4.98% QoQ, respectively, in constant currency terms.The management commented that in the coming quarters the growth will continue to be led by IMS on back of the large deal wins in recent quarters. Whereas, discretionary projects continues to be under greater scrutiny by clients and only those projects which offer high ROI in short term are being under taken by the clients and hence discretionary spend will continue to be under pressure in near term.”

“Considering better than expected earnings performance in Q1 FY13 and strong deal pipeline, we maintain our “accumulate” recommendation on the stock with a price target of Rs. 653 by assigning multiple of 13 times (i.e. around 25% discount to TCS's target P/E multiple) to its FY14E EPS of Rs 50.2,” says KRChoksey research report.

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