HCL Technologies - Reader's Digest Bankruptcy – Impact Not To Be Significant - Nirmal Bang

Reader's Digest Association (RDA), the owner of the popular magazine, Reader's Digest has filed for Chapter 11 bankruptcy in the US, the second time since August 2009. The company is reeling under high debt and will attempt to reduce it by US$465mn when it exits Chapter 11. It should be noted that RDA's international operations are not part of the filing. RDA is an important client of HCL Technologies (HCLT), having signed a seven-year, US$350mn deal with it in March 2009, spanning application development and infrastructure services across 45 countries in North America, Latin America and Asia. While there may not be an impact on HCLT at this point of time, an important event to watch is RDA's emergence from bankruptcy.

The company expects to come out of restructuring over six months. In our view, a worstcase scenario would be RDA shutting down, in which case HCLT would lose the contract and write down receivables of US$4.3mn for services rendered. There could also be uncertainty as regards RDA's IT strategy after emerging from bankruptcy, in which case HCLT's revenue from RDA could also decline.

In a worst case scenario, if RDA is unable to come out of bankruptcy and HCLT loses the contract, we expect revenue impact of 0.9%, EBITDA margin impact of 50bps and EPS impact of 2.5% in FY14E. Currently, in the wake of stronger-than-peer revenue growth, healthy EPS CAGR of 28.8% over FY12-FY14E and a reasonable valuation at 12.2x FY14E EPS, we have retained our Buy rating on HCLT with a target price of Rs840.

Source : Equity Bulls

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