Buy HCL Technologies; target of Rs 980: Centrum

Centrum's research report on HCL Technologies

HCL Tech delivered steady 2QFY17 results with EBIDTA margin beat aiding in PAT beat. However, USD revenues were tad below our estimates. Management retained revenue growth guidance of 12-14% in cc (11-13% in USD) as well as retained EBIT margin guidance (19.5-20.5%) for FY17. The USD revenue growth guidance implies 1.4-3.6% CQGR over the next two quarters. We model HCL Tech’s USD revenues to grow at 12% for FY17E (8.8% organic and rest owing to Volvo deal and IP partnership deal). We have not yet built geometric acquisition in our financials. HCL Tech’s organic USD revenue growth for FY17 would be at a tad above Infosys (~8.4% USD revenue growth). We retain our EPS estimates at Rs57.5/63 for FY17/FY18E and TP at Rs980/sh (15.5x FY18E EPS). Maintain Buy.

We expect HCL Tech to deliver 12%/10.2% USD revenue growth for FY17E/18E (12.8%/10.3% USD modelled earlier). Our FY17 growth implies organic growth of 8.8% and rest owing to Volvo acquisitions and IP deal revenues. HCL Tech’s organic growth for FY17 would be above larger peers (Infosys/TCS expected to grow at 8.4/7% in USD for FY17). Valuations are moderate at 13.2x FY18E EPS and HCL Tech currently trades at 21% discount to TCS. Maintain Buy.