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HCL Technologies on a Roll + Robust Deals – Re-Rating ?

April 21, 2012

HCL Technologies is the Second Best IT Stock on Dalal Street after TCS in the last 4 years. It has registered among the strongest growth in the sector over the past year or so and its relatively low-margin base also provides some cushion. The company reported consolidated revenue up by 2.5% qoq to US$1.05bn led by IMS (+5%) and BPO (+6%); software services grew a slower 1.5%. EBITDA margin at 18% (-13bp qoq). PAT up 5% qoq to Rs5.8bn.

This set of numbers should assuage some of the sector-related concerns brought on by Infosys’ report last week. The financial services segment for HCLT saw a 4% QoQ reduction in revenue, however, this vertical bears close tracking for the sector.

HCL Technologies Robust Deals HCL won US$2.5 bn worth of new deals in the last 6 months, implying a 10% revenue CAGR for next 5 years just from these deals. This emphasizes HCL’s ability to win higher market share from deal churn over 2012 (US$45bn deals up for restructuring) and supports multi-year revenue growth visibility. Also high 79% utilization rates, headcount addition appears modest.

HCL Technologies Management Views:Across the financial services vertical, companies were looking to reduce costs significantly. Hence, discretionary projects were being postponed and nondiscretionary project costs were being squeezed. As per management, while this would lead to near-term revenue decline, this scenario is giving them the opportunity to break into accounts. They also added that Deals are of Vendor Churn exercise rather than any new contracts.

HCL Technologies EPS Estimates and Stock Target Price
HCL Technologies Year ends in June hence all the EPS Estimates are for June-2013 and 12 Months Target Price of various Research entities.
Credit Suisse – Rs 38.5 and a Target of Rs 585
Deutsche Bank – Rs 35.5 and a Target of Rs 535
JP Morgan – Rs 38.5 and a Target of Rs 570
Goldman Sachs – Rs 41 and a Target of Rs 590
Standard Chartered – Rs 40 and a Target of Rs 600
IDFC Institutional Research – Rs 38.5 and a Target of Rs 500
Kotak – Rs 37.8 and a Target of Rs 490 [Very Bearish]
ENAM Axis Institutional Research – Rs 38.5 and a Target of Rs 585
Angel Broking – Rs 38.5 and a Target of Rs 560

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