HCL Technologies - Rating: BUY; Target Price: Rs1,540 - Centrum

During the quarter, we expect HCLT to have revenue traction that leads the peer group with growth of 3.7% QoQ as its new contract ramp-ups offset any drag from furloughs, holidays and leave. We also hope to see some signs of improved traction with their Application Services (if seen, we expect this to be a key positive trigger for the stock in the near-term).

We expect wage hikes and head count additions to weigh on margins by as much as 126bps and overall EBITDA margins to decrease QoQ by 131bps to 25.0%.

We expect slight forex gains this quarter for a total swing of ~Rs1,800Mn in Other Income that will take up Net Profits 5.2% QoQ despite the slightly lower operating margins.

Earnings and target price revised upwards: We are upgrading our revenue estimates by 0.1%/4.2% for FY14E/FY15E respectively primarily due to a revision in the USD-INR rate. This has also led to an improved EBITDA margin estimate and narrower hedging losses as we anticipate a less volatile currency environment. We introduce our new Dec'14 TP of Rs1,540 (14x 1-year FWD EPS at Dec'14) and maintain BUY rating on the stock.

Source : Equity Bulls

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