HCL Technologies - Q2FY14 Result Update - Kotak

HCLT's results were higher than expectations, both, on the revenues and margins. Revenues growth of 3% in CC terms was a positive surprise in a seasonally weak quarter. It is also higher than that reported by Infosys and TCS. The 3% QoQ growth came in despite a 1% increase in employee strength and fall in utilization levels. However, the overall revenue growth has come in largely on the back of IMS only, for the sixth successive quarter.

We believe that, the competition in this market is set to intensify with several players now focusing more on this segment. Margins fell slightly despite salary hikes, due to projects reaching steady state, G&A spend rationalization and improved efficiencies. Utilization levels excluding trainees have remained at about 84% in 2Q and it may be difficult to increase the same further. Some salary hikes have been postponed to 2H. Thus, the company needs to improve growth rates in non-IMS businesses and implement more levers to sustain margins.

Our FY14E and FY15E earnings stand at Rs.84.9 (Rs.81.6) and Rs.95 (Rs.87.8). Consequently, our PT stands at Rs.1422, based on FY15E earnings. Our target valuations are at a suitable discount to those accorded to Infosys. With a sharp run up post 1QFY14 results, we recommend REDUCE (ACCUMULATE). We will look for better opportunities to enter the stock.

Source : Equity Bulls

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