Buy Hcl Technologies CMP Rs 304 for a Target of Rs 365
Focus on large deals paying off …
HCL Technologies’ results for the quarter ending Sept 30, 2007, (Q1FY07) were lower than our expectations. It
recorded a 6% growth in top line to Rs 1,709 crore compared to our estimates of Rs 1,750 crore (9% growth).
However, the company continued to benefit from its focus on large deals. During the quarter, it bagged two
large deals – one a $250 million contract. The traction in large deals coupled with strong traction across
business lines like engineering and R&D, and infrastructure services is comforting. The company recorded its
highest-ever quarterly head count addition for IT services with 2,831 net additions. We believe the growth
momentum should pick up going forward. We reiterate our performer rating on the stock with a price target of
Rs 365.
Margin decline marginal despite wage hikes
The company recorded EBIDTA margins of 21.3% for the quarter registering only a 24bps (100bps = 1%) decline
despite wage hikes. This was partly aided by a 43bps decline in SG&A and a 1.4% growth in realizations. The
company continues to see a 3%-5% increase in billing rates for renewals and a 5%-8% increase for new deals.
Management aludes to a robust demand environment
The management reiterated the view expressed by Infosys and TCS that there is no visible slowdown in the
demand environment. The company indicated that the deal pipeline was stronger than it had ever seen before.
Valuation
We believe HCL Technologies would continue to benefit from its strategy of focusing on large deals and
uncontested markets. We reiterate our performer rating on the stock with a price target of Rs 365.
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