Buy HCL Tech; target of Rs 689: Aditya Birla Money

Aditya Birla Money is bullish on HCL Tech and has recommended buy rating on the stock with a target of Rs 689 in its October 18, 2012 research report.

“HCL Tech continued to clock healthy topline growth of 3.1% QoQ to 1113.8 mn from 1079.6 mn and a 11.1% YoY from 1002.3 mn. In rupee terms, it registered a growth of 2.9% QoQ to ` 60.91 bn from ` 59.19 bn. The company has witnessed decent volume growth (2.5%) for software services. On service basis, Run The Business (RTB) such as Infrastructure Management services (IMS) & BPO led the growth by 10.4% & 5.5% respectively, whereas Change The Business (CTB) such as Enterprise Application Services (EAS) & Engg & R&D services (ERD) remained under pressure (-1.3% & 0.4% respectively). In terms of verticals, emerging verticals (Life sciences 14.6% & Retail 10.3%) led the growth, whereas Telecom remained soft (-3.3%). On geographical mix, US (3.9%) and Europe (2.8%) led the show (QoQ $ terms).”

“We believe that, HCL would extract more out of the current unfavourable and somewhat similar environment, with its proven strategy placing itself once again in the sweet spot. HCL Tech continued to remain in Top 5 players in TPI index across all regions and segments especially in RTB segments like BPO and ITO Till the macro environment improves CTB deals would likely to remain choppy whereas RTB side is expected to see more restructuring contracts upcoming for renewals in the next 6 to 18 months. We believe HCL Tech is major contender in ITO deals and directly competes with Global MNC’s like Accenture, CGI, HP & IBM.”

“The results were in-line with estimates on revenue terms and surprised on margin and PAT front. Management continued to sound optimism on the company outlook based upon the strong order wins and execution. We revise our earnings upwards by 4.1% and 5.9% for FY13E and FY14E to factor in the better than expected execution.  Currently HCL trades at a consolidated P/E of 12 2x and 10 6x on its FY13E and FY14E earnings of Rs47 5 and Rs 54 7 respectively We reiterate ourpositive view on HCL based upon a) industry leading growth (CAGR of 24% FY09-12), b) strong revenue visibility ($2.5 bn worth deal) & upcoming restructuring deals in 6 to 18 months, c) stable operating margin (improved from 16.3% in Q1FY11 to 22.2% in Q1FY13, which was key concern for the investors) and d) healthy free cash flow position. These above mentioned factors would help HCL Tech to trade close to some of its larger peers in the medium term. We continue to value HCL at 12x on its one-year forward earnings with revised target price of Rs689.2 and reiterate our buy rating,” says Aditya Birla Money research report.

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