'Reduce' HCL Tech - TP Rs.430 - Geojit BNP Paribas Financial Services

- HCL Tech has been rated to 'reduce' with a target price of Rs.430 over one year. Currently, the stock is traded around Rs.513 range.

- Company's revenue beats market expectations marginally in 4QFY12 (year end in June) and EBIT and EPS are significantly ahead of market estimates.

- USD revenue in the quarter increased 4.6% qoq on constant currency basis led by 9.2% qoq growth in infrastructure segment.

- Unlike peers, forex gains flowed to the bottom line, driving a surprising 370 bps qoq increase in EBIT margin.

- All costs declined qoq, putting EPS much ahead of estimates.

- Growth was generally broad-based but in constant currency terms, Europe business grew 7.1% qoq, financial services increased 5.2% qoq, healthcare at 22.9% qoq and energy& utilities at 13.1% qoq.

- The company reported eight transformational deal wins in 4QFY12 totaling 52 deal wins in FY12.

- Company's sales strategy, broad service portfolio and low margin positioning seem to be working well in a value conscious market. But, it seems that the stock performance will depend up on sustainability of margins.

- Its peers continue to lose constant currency margins despite a 20% plus decline in dollar rupee exchange rate.

- At current exchange rate, HCL is expected to maintain an annual EBIT margin of 16.5%. However, its margins have been historically volatile, making calculations risky.

- Out of the operating cash flow of USD 248 million in 4Q, USD184 million came from higher current liabilities such as tax payable and unrealized forex hedges. Therefore, concerns remain on cash conversion.

Source : Equity Bulls

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