Buy HCL Tech; target of Rs 676: Motilal Oswal

Motilal Oswal is bullish on HCL Tech and has recommended buy rating on the stock with a target of Rs 676 in its October 17, 2012 research report.

“HCL Tech's (HCLT) 4.5% QoQ volume growth, sustained operating margin and 12 large deal wins were the key positives in 1QFY13. Revenue growth in constant currency was 2.9% QoQ and dollar revenue at USD1,114m grew 3.2%, only marginally below our estimate of USD1,119m. Growth drivers for 1QFY13 include IMS (+10.3% QoQ), Healthcare (14.9% QoQ), Retail (10.9% QoQ), Media (7.4% QoQ) and BFSI (4.1% QoQ).”

“Sustained margins (21.8% EBITDA, +20bp QoQ v/s est. of -230bp) in a quarter of wage hike were aided by: [1] lower impact from wage hikes (80bp v/s est. of 200bp), [2] lower SGA at 13% v/s est. of 13.9%, [3] revenue mix shift in favor of offshore (150bp QoQ) and [4] utilization including trainees, at 74.2% v/s est. of 73%. PAT (after ESOP charges) was INR8.72b and significantly beats our estimate of INR7.93b, despite forex losses of INR609m (v/s est. of INR222m), due to greater profitability and lower tax rate (23.1% v/s est. of 24%). Notwithstanding near term headwinds, there is still scope for HCL to expand margins through levers of: [1] utilization, where internal targets remain higher than current levels, [2] employee pyramid, [3] greater offshoring as deals in RTB space mature and [4] BPO, where profitability is expected to grow to overall company average in couple of years.”

“Our revenue estimates are largely unchanged. However, we have raised FY13/FY14 earnings estimates by 5.7%/6.9% due to an upgrade in EBIT margin estimates by 113bp/60bp. We maintain that rare visibility on volume growth in an uncertain environment and continued impressive execution, reflected in strong margins, would warrant a higher multiple. Our EBIT margin estimate of 15.5% in FY14 conservatively builds a 220bp YoY decline, thus providing reasonable comfort to our earnings estimate. Maintain Buy,” says Motilal Oswal research report.

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