Upgraded HCL Tech to 'buy' – TP Rs.800 - Geojit BNP Paribas

- HCL Tech has been upgraded to 'buy' with a target price of Rs.800 from the previous 'reduce' rating with a target price of Rs.550. The stock is currently traded in the range of Rs.705.

- Previously, we were worried that HCL Tech's deal wins would prove to be margin dilutive considerably, but we now believe its strong execution has proven us wrong.

- Steadily improving cash flow metrics alleviate our concern about the stock being expensive on FCFF.(free cash flow to the firm)

- USD revenue growth of 3.6% qoq for 2QFY13 (Year end in June) was above analysts' estimate of 2.6%. HCL's performance is solid in line with peers in a seasonally weak quarter.

- EBIT margin improved 43 bps qoq against market expectations of a drop in margins. Improved EBIT margin is on account of improved utilization and efficiency, partly offset wage hike.

- This, along with higher other income led a 15% EPS beat.

- FY14 expected USD revenue cut by 1% due to weakness in the core software business but raise FY13-14 expected EBIT margin by 126-202bp and EPS by 11-16%. Despite modeling a modest decline in EBIT margin through FY15, we effectively carry forward the stronger 2Q margins.

- In 2QFY13, infrastructure services revenue increase at 10% q-q at constant currency (CC) was strong, but software revenue barely grew (+0.5% q-q CC).

- With a likely cyclical recovery ahead and with healthy order wins worth USD1b in 2Q, HCL Tech is well-positioned to at least maintain its current q-q growth rate (~3.1% average since 1QFY12) that is needed to meet our estimates.

- HCL Tech remains a margin story, with the EBIT margin having expanded 560bp since 1QFY12 on operational improvements. Under the new CEO, who has been increasingly handling day-to-day running, the company is expected to continue to run a lean model, balancing growth with a CC EBIT margin target of 18-19%.

Source : Equity Bulls

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