HCL Technologies - 2QFY2014 Result Update - Angel Broking

For 2QFY2014, HCL Technologies (HCL Tech) came out with a better-than-expected set of results, largely on all fronts, joining Infosys in signaling the likelihood of a stronger year ahead. The growth during the quarter was once again led by infrastructure services, revenues from which grew by 6% qoq. HCL Tech won 15 transformational deals during the quarter and booked US$1bn+ TCV worth of deals, making it the fifth consecutive quarter of signing ~US$1bn TCV worth of deals. We recommend an Accumulate rating on the stock.

Quarterly highlights: For 2QFY2014, HCL Tech reported a revenue of US$1,321mn, up 4% qoq, led by a strong 6% qoq dollar revenue growth in its Infrastructure Services business. Excluding IMS, in the last 3 quarters, revenue growth had become a concern for the company, but in this quarter (2QFY2014) the company partially shrugged it off by registering a 3.1% qoq USD revenue growth (vs 1% in 1QFY2014; excluding IMS). In INR terms, the revenue came in at Rs. 8,184cr, up 2.8% qoq. The company's EBIT margin declined marginally by 10bp qoq to 23.7%. The PAT grew by 5.6% on a qoq basis to Rs. 1,495cr, assisted by sequentially lower forex losses at Rs. 158cr as against loss of Rs. 236cr in 1QFY2014.

Outlook and valuation: HCL Tech has recorded a ~3.4% CQGR in its revenue over the past eight quarters. This is primarily on the back of infrastructure management services (IMS) maintaining growth momentum and growing substantially higher than the company's average growth rate. The Management noted that growth in revenues from software services will pick up when the respective component in the large deals won recently ramps up. We believe that sustaining the run-rate of large deal wins is a healthy sign and should translate into better revenue visibility for the company in FY2015. We expect HCL Tech to post a USD and INR revenue CAGR of 14.2% and 21.3%, respectively, over FY2013-15E and remain watchful of the company's performance in core software services. We expect the EBIT and PAT to post a 28% and 29% CAGR over FY2013-15E. We value the company at 15.5x FY2015E EPS and give it a target price of Rs. 1,510. We recommend an Accumulate rating on the stock.

Source : Equity Bulls

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