Maintain 'reduce' on HCL Technologies – TP Rs.500 - Geojit BNP Paribas

- Reduce rating on HCL Tech is retained with a target price of Rs.500 over one year.

- 1QFY13 USD revenue growth of 3.2% qoq (2.9% on constant currency basis) missed street estimates in a seasonally strong quarter.

- EBIT margin was flat qoq but better than street estimates on improved utilizations and efficiencies.

- Core Software costs were surprisingly unchanged q-q despite wage hikes.

- Growth was skewed towards infrastructure services (contributing 27% of revenue) grew 10.3% q-q on a constant currency (CC) basis.

- Core Software (contributing 69% of revenue) barely grew.

- HCL Tech's CC growth averaged ~3.3% over the past four quarters. To achieve the consensus mid-teens (about 16%) growth estimates for FY13, the quarterly average growth rate needs to be accelerated further. This seems difficult with the holiday period ahead.

- Management sees continued opportunities in the US and Europe deal renewal markets, especially in infra services where HCL Tech is well- positioned (USD61b renewals due in 2HCY12)

- On margins, it expects lower-cost staffing, utilizations and efficiencies in G&A costs to counter the 100bp wage hike impact in 2Q.

- The stock appears expensive at the current valuation and the 'reduce' rating is retained.

Source : Equity Bulls

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