STOCK MARKET DESK

HCL Technologies Recommendation: Buy Price target: Rs318 Current market price: Rs261

Result highlights

• HCL Technologies (HCL) has reported a revenue growth of 7.1% quarter on quarter (qoq) and 23.3% year on year (yoy) to Rs1,944.8 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 business process outsourcing [BPO] business). The volume growth was partially mitigated by the adverse impact of an offshore shift (0.3%) and lower material billing in the IMS business (1.1%) during the quarter.
• 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 earnings before interest, tax, depreciation, and amortisation (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.
• We have lowered our earnings estimate for FY2008 and FY2009 by 1.4% and 8.9% respectively. We have also introduced the FY2010 estimate and factored in a higher tax rate and exchange rate assumption of Rs38.5 per dollar. At the current market price, the stock is trading at 12.2x FY2009 earnings estimate and 10.9x FY2010 earnings estimate. We maintain our Buy recommendation on the stock with revised price target of Rs318.