HCL Technologies - Multiple growth drivers; initiate with Buy - Anand Rathi

HCL Technologies (HCLT) has grown its revenues by 28.4% CAGR, backed by growth in its FPP-based contracts (41.6% CAGR) and IMS vertical (43.1% CAGR) over FY07-12. Further, Axon acquisition has aided 4% CQGR in EAS. We initiate coverage with a Buy, and target of Rs.730.

- FPP contracts, IMS key growth enablers. With 51% (1QFY13) fixedprice (FPP) contracts, HCLT keeps costs in check, registering 41.6% CAGR over FY07-12. Further, the IMS vertical has grown more than 43.1% over this period. HCLT overtook TCS (in IMS) in FY10, and now commands 28% market share (up from 23.7% in FY07). The number of its active clients has steadily risen from 426 (1QFY11) to 536 (1QFY13); mega clients (contributing over US$100m revenue), are up from one to five.

- EAS expanding through acquisitions. To expand Enterprise Application Services (EAS), it acquired Axon in 2010. Growth rate of 4% CQGR in the division is, however, not in line with its expectation (against 5.5% company average). Growth will pick up in a better demand environment, along with industry.

- Revenue CAGR at 12.5% in FY12-15 (13.9% in rupee terms). We expect 12.5% US$ revenue CAGR over FY12-15. EBITDA margin could expand 170bps in FY15 to 20.8%. We expect profit to post CAGR of 17.6% over FY12-15e.

- Valuation. At our target price, the stock would trade at 14.1x and 12.5x earnings and 8.1x and 7.0x EV/EBITDA for FY14e and FY15e, respectively. Our target multiple embeds a 20% one-year-forward valuation discount to TCS, given HCLT's weaker margin profile and return ratios. Risks. Inability to win large multi-year, multi-service deals. Major cross-currency movements, sharp cuts in clients' 2013 IT budgets.

Source : Equity Bulls

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