Accumulate HCL Tech; target of Rs 560: Emkay

Emkay Global Financial Services is bullish on HCL Tech and has recommended accumulate rating on the stock with a target of Rs 560 in its April 18, 2012 research report.

“After the sharp disappointment from Infosys last week, HCL Tech’s March’12 performance provides a sigh of relief in our view. While revenue growth at 2.5% QoQ fell short of expectations mildly ( we estimated a 3.2% QoQ growth), we note that both IMS and BPO segments recorded an impressive 5.1%/6.5% QoQ revenue growth with IT services dragging growth at 1.5% QoQ ( volume growth at 2.9% QoQ). EBITDA margins (including ESOP charge) were down by ~10 bps QoQ at 18% (V/s expectations of ~90 bps improvement) with the improvement in profitability in the BPO segment negated by margin declines in the IMS segment ( margins declined by ~140 bps QoQ despite ~5% QoQ revenue growth). While HC addition was muted in IT Services (increased by ~79 QoQ), reduction in BPO headcount led to an overall decline of ~9% QoQ led to an overall headcount reduction. Metrics performance was mixed with top 5/10 clients growing higher than co average for the 2nd quarter in a row and an improvement across client buckets albeit performance in Financial Services and US were weak ( down by ~2.7% QoQ / 1.1% QoQ respectively).”

“Street has raised concerns on predictability with HCL Tech in the past however recent performances should lend more confidence on execution in our view. HCLT has also done well in bagging large deals in the past 2 qtrs (US$ 1.5 bn worth deals in March’12 qtr on the back of US$ 1 bn worth deals won in Dec’11 qtr) that not only lends higher visibility in a volatile demand environment but also helps company strengthen position in inherent areas of weakness like Financial Services (note that of the US$ 2.5 bn worth TCV secured by the company, ~40% comes from Financial services vertical). We appreciate management’s strategy of focusing on delivery execution over the next few quarters given that it has already built a significant order book. Management remains confident of sustaining 14% EBIT margins over foreseeable future unlike CY09-10 when rampup on the large deals won in OND’08 drove a decline in overall margin profile for the company.”

“Given improving predictability in financial performance (read: revenue growth coupled with stable margins’), we assign a 13x multiple on June’14E earnings (along with rollover to June’14 V/s June’13 earlier) drives a raise in our TP to Rs 560. Upgrade HCL Tech to ACCUMULATE V/s HOLD earlier. Our order of preference within the sector remains unchanged at Infosys, HCL Tech, TCS and Wipro in that order,” says Emkay Global Financial Services research report.

FIIs holding more than 30% in Indian cos

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