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HCL Technologies 3QFY2014 performance highlights and results update

April 21, 2014, Monday, 16:08 GMT | 11:08 EST | 19:38 IST | 22:08 SGT
Contributed by Angel Broking

For 3QFY2014, HCL Technologies (HCL Tech) came out with a better-than-expected set of results, largely on all fronts, signaling the likelihood of a stronger year ahead. The growth during the quarter was once again led by Infrastructure Management Services (IMS), the revenues from which grew by 5% qoq. HCL Tech won 12 transformational deals during the quarter and booked US$1bn+ TCV worth of deals, making it the sixth consecutive quarter of signing ~US$1bn TCV worth of deals. We recommend an Accumulate rating on the stock.

Quarterly highlights: For 3QFY2014, HCL Tech reported a revenue of US$1,361mn, up 3% qoq, led by a strong 5.2% qoq dollar revenue growth in its Infrastructure Services business. In INR terms, revenues came in at Rs.8,349cr, up 2% sequentially. The company’s EBIT margin increased by 97bp qoq to 24.7%, led by sequential decline in SG&A expenses and lower depreciation. The PAT stood tall at Rs.1,624cr, up 8.6% on a qoq basis, assisted by strong operational performance and sequentially higher other income.

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 growing substantially higher than the company’s average growth rate. The Management noted that growth in revenue 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 12.7% and 12.1%, respectively, over FY2014–16E and remain watchful of the company’s performance in the core software services. On the operating front, we remain skeptic on the company’s ability to sustain operating margins at current levels with it going for hiring (with increase in demand) and wage hikes going ahead as attrition continues to remain sticky. We value the company at 14.5x FY2016E EPS and give it a target price of Rs.1,560. We recommend an Accumulate rating on the stock.