Hold HCL Technologies; target Rs 535

"HCL Technologies (HCLT), India's fourth largest IT services exporter with services spanning pure software services as well as IT-enabled services reported ~1% sequential de-growth in revenues to Rs 52,156 mn but revenues grew ~2.5% in USD terms to USD1,048 mn for the third quarter ended Q3FY’12. Software services revenues de-grew ~1.6% to Rs 37,183 mn, Infrastructure services revenues grew ~2% to Rs 12,515 mn and BPO revenues grew ~3.15% to Rs 2,458 mn. Europe and rest of world led the growth among the geographies and Energy-Utilities-Public sector, Media, publishing & Entertainment and Healthcare in the vertical in USD terms."

"HCL Tech. has reported revenues close to our estimation. Our revenue estimation of 51,728 mn stood in a variance of ~1% from its actual number Rs 52,156 mn. HCL has continued to demonstrate superior financial performance backed by a balanced business portfolio. The revenues this quarter are up ~2.5% while EBIT is up by ~8.6% over the last quarter. For 12-month period ended 31st March’12, USD revenues at US$4,035 mn grew by ~22%, EBIT at USD 618 mn grew by ~34% and GAAP EPS (diluted) at USD0.62 grew by ~38% over the corresponding period last year. A key strategic shift in the global IT Industry has been the leveling of the playing field between the Indian Origin Service Providers and the Global MNCs. It is encouraging to note that HCL has continued its growth trajectory even in this environment thanks to its globally competitive business model which is emerging as an attractive alternative to enterprises business worldwide. HCL added 52 new clients (57 QoQ) during the quarter taking the total active clients to 516 clients (516 QoQ). Revenues from top five clients was up 20bps to 16% (4.5% growth LTM), top ten clients revenue at 24.3%, up 10bps (3.5% growth LTM) and top twenty clients same at 33.9% (~3.2% growth LTM)."

"OPM stood at ~17.1% due to 284bps increase in direct costs to ~68.07% of sales and the resultant operating profits were down by ~5% from our expectation of Rs 42,110 mn. Operating margins were up by 110bps to 18.4% partly on account of 57bps decline in S, G& A costs to ~14.16% of sales and 50bps fall in direct expenses to 67.45% of sales and higher blended utilization excluding trainees. Net profit rose ~25% to Rs 6,026 mn, while NPM stood at ~12%, with an expansion of margin at 100bps. The recent outperformance that HCL Tech has been able to put up has given us the conviction that it is only a matter of time before HCL Tech is also considered a top-league player. At CMP, the stock trades at a P/E & P/BVPS of ~11.6x and ~3.4x of FY’13E EPS & BVPS. We re-rate HOLD, re-valuing to Rs 535 from our earlier TP of Rs 475 (a potential upside of ~7% from current levels), factored over a P/E & P/BVPS of ~12.1x and ~3.6x using FY’13E EPS of Rs 44 & BVPS of Rs 148. However, potential of strong upsides are limited in current frame," says R K Global research report.