Buy HCL Tech; target of Rs 1700: Religare Capital

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Religare Capital`s research report on HCL TechnologiesRevenue growth disappoints: HCLT’s revenues grew 1.9% QoQ (+3.2% QoQ CC) to US$ 1.43bn. EBIT margins however contracted 30bps QoQ to 23.9% (RCMLe: 23.6%) due to a lower depreciation charge (one-time in nature due to change in policy), and salary hikes (negative impact of 80bps). PAT came in at Rs 18.7bn, up 33% YoY and 6% ahead of our expectations led by higher interest income. Muted growth across key service lines: IMS/application services reported muted growth of 3.6%/-0.7% QoQ CC, whereas engineering services/enterprise application revenues grew by 8.1%/5.1% QoQ CC. Growth in the Americas was strong at 5.7% QoQ CC, while Europe/RoW reported a weak quarter with 2.7%/-6.4% QoQ CC growth. Vertical-wise, growth was strong for BFSI/manufacturing/retail at 3%/ 5.3%/15.8% QoQ CC, but muted for public services/life-sciences at -5.6%/-1.7% QoQ CC. Employee count touched 95,522 with an addition of 3,831 employees, and utilisation levels slumped 180bps QoQ to 82.7%. DSOs dropped to 56 days from 60 days in Q4. Valuations and View: Overall, Q1FY15 was a muted quarter for HCLT, with disappointment in US$ revenue growth and operating margins (excluding one-off depreciation charges). We pare our FY15/FY16 revenue estimates by 2.1%/1.5% while maintaining BUY on the stock with a Dec’15 TP of Rs 1,700 (rolled over from a Sep’15 TP of Rs 1,625) set at 14.5x one-year forward P/E. "HCLT’s US$ revenue came in below estimates (+1.9% QoQ vs. RCMLe +3.7%) but operating margins slightly higher (-30bps to 23.9% vs. RCMLe: 23.6%). PAT beat was driven by higher margins and other income. Revenue growth for IMS was muted at 3.6% CC whereas application services dipped 0.7% QoQ CC. Growth acceleration is the key for HCLT to maintain industry-level growth, and thus all eyes will be on reacceleration in the IMS business. Post the recent correction, valuations are more reasonable at 13.8x FY16E,” says Religare Capital research report.   

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