HCL Technologies - Deserves re-rating - IIFL

Continued traction on deal renewal market; IMS a key deal making ingredient

Our recent interactions with HCLT management suggests continued traction in re-bidding deals - its key focus area where its deal win rate has improved to ~50% in recent past. Deals worth ~US$260bn coming up for restructuring/renewal over next three years as well as strong client mining potential should bolster HCLT growth in coming quarters too. HCLT's top quartile growth performance amongst peer set in past 6-8 quarters vindicates the same. Infrastructure services, which is the mainstay in renewal deals as well as the increased outsourcing demand from continental Europe should continue to provide revenue fillip to the company.

Margin outlook stable; deal ramp-ups, client mining key levers

HCLT operating profit margin has expanded impressively in the past five quarters by nearly 550 bps. This is mainly on the back of its strategy to invest upfront (in large engagements) and improve profitability over time through continued client mining and increasing use of freshers. Ramp-up of deal wins, effective client mining through up-selling of value added services and better off-shoring of ERP business (Axon) should continue to sustain margins despite continued investments in business.

Sustained performance makes a case for valuation re-rating; Raise estimates and TP; Maintain BUY

HCLT's strong performance over past two years relative to peers as well as on an absolute basis highlights its improved positioning, sustainable margin profile and expanding clientele. The company strategy and positioning should continue to bolster its ability to sustain a top-quartile performance amongst its peer set. Subsequently, its valuations should rationalize further in our view. We increase our revenue estimates and mark up earnings by 2-4% over F6/13-15E and assign P/E multiple of 13.7x (13x earlier) on FY15E adjusted earnings. Despite the recent price run-up, HCLT has decent upside potential. Maintain BUY with 9-month TP of Rs891

Source : Equity Bulls

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