HCL Technologies - Another quarter of $1bn deal wins; Maintain ADD - BRICS

HCLT's revenue of US$1,191 (up 3.2% qoq) and operating margin of 19.9% for Q3 came in line with our expectations. Earnings surpassed our estimate, mainly due to forex gains and higher other income. HCLT signed large transformational deals worth TCV of $1bn in Q3. Our revenue estimates remain largely unchanged, though we are marginally raising our FY13/14/15 EPS estimates by 3.5%/2.1%/0.6%, respectively, to factor in earnings outperformance in Q3 and currency movements. We retain target P/E multiple of 13.5x, but raise TP to Rs845 (from Rs800). Maintain ADD.

Strong growth with stable margins: HCLT's revenue growth of 3.2% qoq in US$ terms (up 2.4% qoq in INR terms to Rs64.2bn) was led by the Infra business, up 8.6% qoq, which continued to outperform other business lines (Software services up 1% qoq and BPO up 0.6% qoq). Operating margin remained stable at 19.8%, as an improvement of almost 190bps qoq in blended utilization to 83.6% (from 81.9% in Q2) offset the negative impact of investments in S&M efforts and currency headwinds. HCLT's earnings of Rs10.4bn (up 7.8% qoq) was boosted by forex gains & higher other income.

Deal wins momentum sustains: HCLT won multimillion US$ deals worth TCV of $1bn in Q3 (US$1bn in Q2), with 90% from re-bid market and over 50% being integrated deals. HCLT remained aggressive in renewal market and management indicated that about US$50bn of addressable market will come up for the company by CY15 end.

Valuation: Stock trades at P/E of 13.3x FY13, 12.5x FY14 and 11.6x FY15 EPS estimates. Raising TP to Rs845, while keeping P/E multiple unchanged at 13.5x, as we rollover to FY14-15 average earnings. HCLT offers better growth visibility than its peers, due to continued momentum in deal signings and strength in renewal market. HCLT's operating margin is also likely to be stable in the 18-20% range, owing to its focus on execution and sustained turnaround in BPO. Maintain ADD.

Source : Equity Bulls

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