Accumulate HCL Tech; tgt of Rs 575: Arihant capital markets

Arihant capital markets is bullish on HCL Technologies and has recommended accumulate rating on the stock with a target of Rs 575 in its April 20, 2012 research report.

“HCL Tech posted their Q3FY12 result which was broadly inline with our expectation. Total revenue came slightly lower than our expectation at Rs.5215.6cr—down by 0.6% QoQ, while net profit came as per expectation at Rs.602.6cr—up by 5.2% QoQ. In US$ terms, total revenue came at $1048mn (up by 2.5% QoQ). Volume growth healthy at 2.9% (onsite -3.7%, offshore 5.4%). Pricing however saw a decline of ~1.5% QoQ. The company’s bottomline was impacted by a forex loss of Rs.75.8cr due to the sharp rupee depreciation.”

“HCL maintained their EBIDTA margin at ~18.4% in Q3 despite facing headwinds from currency appreciation as well as pricing pressure. This was made possible on account of a number of operational efficiency that the company was able to bring about in Q3 like an improvement in utilisation rate to 82.5% from 80.7% in Q2, increase in Fixed Price contracts to 49% from 46.1% in Q2 as well as an increase in offshore effort. All the service lines of HCLT exhibited good growth in Q3. It was a great relieve to see the Infra vertical leading with a growth of 4.5% QoQ after a decline of 2.9% in the previous quarter. The EAS (Enterprise Application Service) service line continued its strong performance by growing by 3.5% QoQ. Even BPO grew by a robust 5.5% QoQ. Among industry lines, Telecom grew by a whopping 10% QoQ, followed by Healthcare at 8.1% and Energy & Utilities at 7.6%.”

“HCL continued its deal signing momentum by winning over $1.5bn (excluding contract renewals) in large multi-year transformation deals across 14 customers in Q3 of which around $1.3bn are from Fortune 500/ Global 2000 organisations. Also, almost 70% of the deals are from new accounts with Financial Services leading in verticals, and Europe leading in geographies with 51% share. Thus, in total in the last two quarter, HCL has booked over $2.5bn deals in large transformational deals—a majority of which are from the Financial services followed by Manufacturing. HCL saw another quarter of strong sequential growth from its top 5 and top 10 customers of 4.5% and 3.5% respectively, which is infact higher than the company’s growth rate. In total, HCL added 52 clients in Q3. The management indicated that they will be now entering a ‘consolidation phase’ wherein they will be concentrating on ‘farming’ their existing clients meaning they will be putting in extra effort to cross-sell and up-sell other products and services to the newly acquired clients.”

“After Infy’s disappointment, HCL’s inline result came as a huge sigh of relief for the market. Though HCL has done well in winning large deals, we believe they must have come at the discount in pricing. We introduce FY14E estimates and also roll over our target EPS to FY13E at Rs.38.3.Thereby, using a PE multiple of 15x we increase our target price to Rs.575 per share and reduce our ‘BUY’ call into ‘ACCUMULATE’,” says Arihant capital market research report.

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