Buy HCL Tech; target of Rs 980: Motilal Oswal

HCLT’s 3QFY17 revenue grew 3.0% QoQ CC, slightly ahead of our estimate of +2.1% QoQ. Notably, growth was broadbased across services, with Engineering leading the pack at 7.1% QoQ CC and other services growing 2-3%. With 9MFY17 growth at 12.9% YoY CC, HCLT kept its guidance of 12-14% CC growth intact, and should reach the higher end with contributions from two IBM partnerships, Butler America and GEOM integrations in 4Q.

Residual contribution from existing partnerships and acquisitions will likely contribute 4pp to HCLT in FY18, helping deliver double-digit CC revenue growth in next fiscal too. With EBIT margin of 20- 20.5% in FY17 (despite 50%+ of contribution from partnerships/acquisitions), we see limited risk to our margin estimate of 19.8% in FY18. We expect USD revenue/earnings CAGR of 11%/10% over FY16-19E. Return on significant FY17 investments (acquisitions + three IBM partnerships) heightens the uncertainty, factoring which we value HCLT at 14x FY19E EPS. Our price target of INR980 implies 15% upside. Maintain Buy.