Recommendation: Buy
CMP = Rs 261
Price target: Rs 318
Key points:
- HCL Technologies (HCL) has reported a revenue growth of 7.1% qoq and 23.3% yoy to Rs 1,944.8 crore for the third quarter ended March 2008. In dollar terms, it has reported a sequential growth of 5.2% in its consolidated revenues to US$484.9 million. The sequential growth in the revenues was driven by a volume growth of 6.6% (a 5.3% growth in software service business, an 8.5% growth in Infrastructure Management Services [IMS] and a 4.5% growth in the BPO business).
- The operating profit margin (OPM) improved by 88 basis points to 22.3% on a sequential basis. The margin improvement was aided by higher realisations (7 basis points), hedging gains (22 basis points), improved revenue mix (26 basis points) and efficiency gains (48 basis points). This positive affect was however partially offset by higher infrastructure expenses of around ten basis points.
- In terms of segments, the EBITDA margin of all the three business lines improved on a sequential basis. The IMS and software service businesses reported a sequential margin improvement of 113 basis points and 93 basis points respectively. The BPO service business reported a 16 basis-point sequential improvement in its margin. However, the forex loss of Rs 27.1 crore as compared with a forex gain of Rs 5.8 crore in Q2FY2008 resulted in a relatively lower earnings growth of 2.9% qoq to Rs 342.5 crore.
- In terms of operational highlights, the company signed deals worth $500 million during the quarter. However, it has maintained its full year revenue growth guidance of around 35%, implying a relatively muted sequential growth in Q4FY2008. This is largely due to a slowdown in the business from two of its top ten clients as a fallout of the scenario in the
- At the current market price, the stock is trading at 12.2x FY2009 earnings estimate and 10.9x FY2010 earnings estimate.
- I maintain Buy recommendation on the stock with revised price target of Rs 318 over next 3 months.
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