For 3QFY2011, HCL Technologies (HCL Tech) reported strong numbers, way ahead of street but slightly below our expectations, shunning remote concerns related to the IT demand environment that began surfacing post Infosys’ results. HCL Tech has been a beneficiary of the return in demand for enterprise services, and we expect it to ride on the spending on discretionary services. The company is expected to post a revenue (USD terms) and PAT CAGR of 25.6% and 31.9%, respectively, over FY2010–13E, ahead of other tier-I companies. We maintain our Buy rating on the stock.
Robust numbers: For 3QFY2011, HCL Tech reported revenue of US$914.5mn, up 5.8% qoq, on the back of 4.8% qoq volume growth and 1.0% qoq benefit due to cross-currency movement. EBIT margin also increased by 128bp qoq to 14.4% on the back of 1) improvement in utilisation level, 2) lower SG&A investment and 3) higher revenue productivity along with currency benefit.
Outlook and valuation: Management is witnessing a strong demand environment and has signed 11 transformational deals in 3QFY2011 itself on the back of 17 sign offs in 2QFY2011. We expect HCL Tech to be the outperformer among tier-I IT companies, with a revenue (INR terms) CAGR of 23.7% over FY2010–13E on the back of its higher-value services portfolio. At the operating front, levers such as 1) managing SG&A 2) expanding utilisations and 3) turnaround in the BPO segment are expected to improve margins. Thus, we expect EBITDA to grow at a 19.6% CAGR over FY2010–13E. PAT, on the other hand, is expected to post a much higher CAGR of 31.9%, with improving profitability, forex gains on hedges and treasury gains. We maintain our Buy rating with a target price of `603.
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