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HSBC Bullish on HCL-Technologies

April 20, 2007

HCL Technologies is now being re-rated by several research houses. HSBC upgraded the stock to BUY with a price target of Rs 350.

HCLT reported a better than expected Mar2007 quarter. HSBC raised revenue estimates for FY07-09, performance at EBIT level has been largely in line with estimates for 9mFY2007. Higher other income due to Fx gains drives better than expected net income in Mar2007 quarter.

Mar07 results: Revenues at INR15.7bn (+7.6%q-o-q, +40.6%y-o-y) were higher than expected. EBIT was at INR2.8bn (+15.3%q-o-q, +51% y-o-y) with EBIT margins at 17.9% (+119bps q-o-q,+ 126bps y-o-y). Higher other income due to Fx gains helped net profits at INR3.1bn (+16.3%q-o-q,+71.4%y-o-y) adjusting for the charge on stock grants to employees. HCLT has a forward cover of over USD900m (at INR44-45), which is the highest as a proportion of its revenues in the industry.

HSBC expects HCL Tech to grow revenues and profits at CAGRs of 27% and 20% for FY2007-09 with Infrastructure and BPO business growing faster than the company average. Though margins for HCLT have recovered, it continues to grow slower than large companies with significantly lower profitability despite its smaller revenue base.

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