Accumulate HCL Technologies - Elara Capital

• HCL Technologies
• Rating : Accumulate
• Target Price : INR404
• Upside : 7%
• CMP : INR378 (as on 29 July 2010)

It's a market share gain story

In line quarter for HCL Tech

Topline growth of 11.3% qoq beat our estimates and was led by growth in application software and IMS. The revenue growth has been almost entirely volume led (making HCL Tech the best volume performer in this result season). The churn in the BPO segment has continued but strength across verticals and horizontals in IT services more than made up for it. The marginal beat on the PAT level is however, a function of lower tax rates this quarter. Forex headwind is likely to wind up almost completely by end of next quarter.

Deals in the pipeline

While the pace of the deal signings have slacked off after the pace seen in last quarters of CY09, the rebid market for HCL Tech is opening up from next quarter. The 4 deals signed in this quarter by HCL Tech are on the integrated IT-BPO side. While HCL Tech is relatively small among the Tier-1 Indian vendors, TPI data does show that the Company has been gaining market share, at least in the IMS space.

Supply side management – so far so good

Inspite of no wage hikes yet, attrition has remained at acceptable levels. Our base case call on the Indian IT vendors remains that the current quarter is likely to be the peak attrition for this cycle. Utilization has dipped by only around 200bps qoq in spite of an aggressive net addition of 6428.

Stay positive on likely markets share gains

HCL Tech does seem to be garnering an incremental share of the IT services market (from the perspective of Indian vendors) for the last 4 -6 quarters. With the rebid market opening up and greenfield deals in SI, we believe that the market-share gain is going to continue. HCL Tech is valued at 13.8x FY11 earnings. We have largely held our PAT estimates even as our topline estimates have gone up. We reiterate that from a multi-quarter perspective, HCL Tech remains among our better bets in terms of multi quarter upsides on the back of 1) volume growth 2) removal of forex hangover and 3) deals in the IMS space.

Source : Equity Bulls

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