CMP = Rs 274
Price target: Rs 354
Result highlights:
- HCL Technologies (HCLT) has reported a revenue growth of 6.3% quarter on quarter (qoq) and 24% year on year (yoy) to Rs 1,816.6 crore for the second quarter ended December 2007. In dollar terms, it has reported a sequential growth of 7.4% in its consolidated revenues to $461 million.
- The sequential growth in the revenues was driven by a 6.6% growth in the volumes, a 1.6% improvement in the blended realisations and a 1.3% gain from hedging. On the flip side, the revenue growth was adversely impacted by 1.1% due to lesser number of working days in Q2, by 0.8% due to the offshore shift and by 0.2% due to lower effort based pricing revenues during the quarter.
- The operating profit margin (OPM) improved by 10 basis points to 21.4% on a sequential basis due to the cumulative positive impact of higher realisations (123 basis points), hedging gains (100 basis points) and efficiency gains (69 basis points). This positive affect was however partially offset by higher overheads cost (89 basis points due to global customer meet), rupee appreciation (107 basis points) and lower working days (83 basis points).
- The healthy growth of 34.9% in the other income and lower effective tax rate resulted in an earnings growth of 7.9% qoq to Rs 332.9 crore, which is ahead of the street expectations. The company realised treasury gains of $12.3 million in Q2 (as compared with $9 million in Q1).
- It has around $20.3 million of unrealised treasury gains on its books. In terms of accounting treatment for foreign exchange (forex) cover, the company realised net gains of $9 million in Q2, of which $7 million was accounted for in the revenues. It has around $63 million of unrealised forex gains on its books as on December 2007.
- In terms of operational highlights, the company has signed two large deals (multi-million, multi-year) during the quarter, including a $300-million deal (the fourth deal of over $200 million in the past 24 months). The company added 2,312 employees in Q2 (5,937 in H1) and the attrition rate in the software services business declined to 15.5% (declining for the fourth consecutive quarter). It reported robust sequential growth in revenues from US geography (7.9%) and financial services vertical (14.1%) during the quarter.
- HCLT sounded more confident about the demand environment as compared with some of its peers. The management, as per its assessment, believes that the weak economic environment could put pressure on the discretionary Information technology (IT) spending in USA.
- But the focus is more on investing in IT solutions to improve the overall organisational efficiencies and cope up with the challenging environment (rather than cut cost as seen post the dotcom bubble bust in 2001). In fact, the management believes that certain pockets would witness an increase in discretionary IT spending due to tough economic conditions such as enterprise solutions (ERP and CRM). This is clearly reflected in the record license sales by SAP during the last quarter.
- At the current market price the stock trades at 14.8x FY2008 and 11.6x FY2009 estimated earnings.
- I maintain Buy recommendation on the stock with a price target of Rs 354.
