HCL Technologies - Outperformance continues... - MSFL Research

HCL Tech delivered strong Q3 numbers. Top line was slightly better than expectation at USD 1191mln registering 3.2% q-o-q growth. Operational performance was way above expectation as EBITDA margin decline only by 18bps to 22.4%. Lower depreciation, better other income and forex gain further aided net profit growth of 7.9% q-o-q. New deal wins continues to be robust for HCL Tech as it added more than USD 1bln of TCV during Q3 as well with 90% of them from renewal market. This aggregates to more than USD 2bln TCV of deals over OND-JFM quarter and provides good revenue visibility going ahead. Better revenue growth and improving productivity is hence aiding in better margin performance q-o-q. Management will continue to invest for future growth and is comfortable at 18-19% EBIT margin which presently stands at 19.7% for 9mFY13. We continue to remain positive on HCL and recommend BUY with raised TP of Rs. 854 valuing at FY15P March ending EPS of Rs. 65.7.

Robust volume growth drive revenue: Execution was strong during the quarter at 3.2% q-o-q USD revenue growth. Growth was driven by IMS space which grew at 8.6% q-o-q followed by Enterprise Applications at 3.2%. BPO grew at 0.8%, Engineering & R&D at 0.2% and Custom Application at 0.1% q-o-q. Europe grew strongest at 4.6% followed by US at 3.5% while APAC was soft and declined by 1.1% q-o-q. Among verticals, E&U and Manufacturing grew strongest at 13.5% and 7.5% respectively followed by Telecom and Retail at 3.2% and 2% respectively. Financial service was flat while Media & publishing and Life sciences were soft and declined by 1.2% and 2% q-o-q respectively.

Margin surprise positive: Decline in EBITDA margin was lower than expected at 18bps led by better productivity, utilization increase absorbing incremental SG&A expenses. Gross addition was 5146 for the quarter while there was net reduction of 791 employees and hence blended utilization went up during the quarter to 83.8% from 81.9% in Q2FY13. Company will continue to drive non linearity and higher fungible resources to improve rate productivity going ahead.

Management commentary remains good: The key highlight of the quarter was another quarter of deal wins with TCV worth USD 1bln which aggregates to more than USD 2bln deal win over OND-JFM quarter. 90% of the deals win were from renewal market during the quarter. Renewal market is expected to remain strong till CY14 and company is also witnessing increase in non-linear revenue share.

Valuation: Strong order book and better deal pipeline provide good revenue visibility. Also we expect margin to stay above 20% led by revenue growth, higher scale and better execution at similar rupee level. We introduce FY15 estimates. Our FY13 earnings has increased from Rs. 53.6 to Rs. 55.2 while FY14 has increased slightly to Rs. 61.9 from Rs. 61.8. We recommend BUY with TP of Rs. 854 valuing at 13xFY15P march ending EPS of Rs. 65.7.

Source : Equity Bulls

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