Buy HCL Tech; target of Rs 1000: ICICIDirect

ICICIDirect's research report on HCL TechLast week, HCL Tech announced an agreement to acquire (through demerger) all of the business of Geometric Ltd, except for an 58% stake that Geometric owns in the JV – 3DPLM Software Solutions Ltd, with Dassault Systems. HCLT would issue 10 equity shares of | 2 each to Geometric shareholders for every 43 equity shares of Geometric held by them. In total, HCLT will issue 1.56 crore equity shares of | 2 each. This implies a value of | 1,280 crore assuming HCLT’s April 1, 2016 close. Though HCLT argues the deal is synergistic and cash earnings per share accretive, we believe, deal valuations are rich. The deal values Geometric ex-3DPLM business at 1.4x annualised FY16E sales and appears rich. Further, the business operates at below HCLT’s average EBIT margins. Finally, growth has been modest as ex-3D PLM business grew at 0.8% CQGR in the past 10 quarters (refer exhibit 1). HCL expects to close the transaction by the October-December quarter. The transaction is likely to alter FY18E estimates given HCLT shifts to fiscal year-end (vs. current June) from FY17 onwards. We await clarity before upgrading our estimates and hence continue to expect HCLT to report revenue, PAT CAGR of 12%, 11%, respectively, in FY15-17E with average 21.2% EBIT margins. Growth will be supported by healthy deal wins – HCLT signed deals with total contract value in excess of $ 1 billion for thirteen consecutive quarters. We value the shares at 16x FY17E EPS of | 63 to arrive at our target price of | 1,000. For all recommendations, click here Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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