Forex gains propel net income; maintain 'Buy'
HCL Technologies Ltd's (HCL Tech) Q4FY07 revenue was in line with our estimates at Rs 16.12 billion, a sequential increase of 2.2%. However, due to Rs 2.5 billion forex gain, net profit (before ESOP charges) increased 46.8% sequentially to Rs 4.87 billion. In continuing with its strategy of focusing on large deals, the company signed seven large multi-year deals in Q4FY07. We expect HCL Tech to post a fully diluted EPS (after ESOP charges) of Rs 18.8 and Rs 23.3 in FY08E and FY09E respectively, implying a two-year EPS CAGR of 12.6%. However, we have not taken into account any forex gains or losses going forward. Currently, the stock is quoting at FY08E and FY09E PER (based on post ESOP charged EPS) of 16.8x and 13.5x respectively. We maintain 'Buy' rating on the stock; we have set a one-year price target of Rs 368 based on 15x FY09E earnings. Key highlights of Q4FY07 are:
Rupee appreciation impacts revenue growth:
Though HCL Technologies reported 9.2% sequential growth in dollar revenue, rupee appreciation of more than 6% led to 2.2% revenue growth in rupee terms. Software services revenue grew 0.7% to Rs 11.5 billion, revenue from BPO services grew 1.6% to Rs 2.2 billion and infrastructure business grew 10.6% to Rs 2.4 billion. Growth in all the three segments were driven primarily by volume growth.
EBITDA margin declines by 170 bps:
Though HCL Technologies was hit by 300 bps on margins due to rupee appreciation and 120 bps due to higher SG&A, EBITDA margin fell by only 170 bps. This was on account of: a) Higher utilisation, which in turn improved margin by 55 bps b) Higher realisations leading to 140 bps margin expansion Though SG&A (as a percentage of revenue) could decrease going forward, the company guided that it would continue to invest in sales and marketing to tap market potential.
Higher forex gains lead to higher net income:
HCL Tech reported forex gains of Rs 2,504 million in Q4FY07 as against a gain of Rs 418 million in Q3FY07, on account of rupee appreciation. The company currently has a forward cover of USD 1.2 billion.
Large deals signed in Q4FY07:
HCL Technologies signed seven multi–year, multi-million dollar deals in Q4FY07. Though the company hasn't disclosed the size of the deals, it did mention that the deals were significantly large in size. In the last few quarters, the company signed a number of large deals indicating that its blue ocean strategy is yielding results.
Guidance shows good revenue visibility:
HCL Tech has guided for a revenue growth of around 30% in dollar terms in FY08E. However, what is more significant is that it has guided to hire a total of 25,000 employees (gross) in FY08E, which is 60% of its current employee base.
Forecast:
We estimate HCL Tech to post a fully diluted EPS of Rs 18.8 and Rs 23.3 in FY08E and FY09E respectively, implying a two-year EPS CAGR of 12.6%. However, we have not taken into account forex gains/losses in FY08E and FY09E. It may be noted that the company had a forex gain of Rs 3.3 billion in FY07. If the forex gains are not taken into account in FY07, HCL Technologies EPS is likely to grow at a two year CAGR of 30%, highst among its peers.
Valuation:
Currently, the stock is quoting at FY08E and FY09E PER (based on post ESOP charged EPS) of 16.8x and 13.5x respectively. We believe that the blue ocean strategy of the company is yielding results leading to HCL Technologies growing faster than its peers. We therefore maintain 'Buy' rating on the stock, with a price target of Rs 368 based on 15x FY09E earnings. At our target price, the stock would be quoting at FY08E and FY09E PER of 18.3x and 15x respectively.
HCL Technologies Ltd's (HCL Tech) Q4FY07 revenue was in line with our estimates at Rs 16.12 billion, a sequential increase of 2.2%. However, due to Rs 2.5 billion forex gain, net profit (before ESOP charges) increased 46.8% sequentially to Rs 4.87 billion. In continuing with its strategy of focusing on large deals, the company signed seven large multi-year deals in Q4FY07. We expect HCL Tech to post a fully diluted EPS (after ESOP charges) of Rs 18.8 and Rs 23.3 in FY08E and FY09E respectively, implying a two-year EPS CAGR of 12.6%. However, we have not taken into account any forex gains or losses going forward. Currently, the stock is quoting at FY08E and FY09E PER (based on post ESOP charged EPS) of 16.8x and 13.5x respectively. We maintain 'Buy' rating on the stock; we have set a one-year price target of Rs 368 based on 15x FY09E earnings. Key highlights of Q4FY07 are:
Rupee appreciation impacts revenue growth:
Though HCL Technologies reported 9.2% sequential growth in dollar revenue, rupee appreciation of more than 6% led to 2.2% revenue growth in rupee terms. Software services revenue grew 0.7% to Rs 11.5 billion, revenue from BPO services grew 1.6% to Rs 2.2 billion and infrastructure business grew 10.6% to Rs 2.4 billion. Growth in all the three segments were driven primarily by volume growth.
EBITDA margin declines by 170 bps:
Though HCL Technologies was hit by 300 bps on margins due to rupee appreciation and 120 bps due to higher SG&A, EBITDA margin fell by only 170 bps. This was on account of: a) Higher utilisation, which in turn improved margin by 55 bps b) Higher realisations leading to 140 bps margin expansion Though SG&A (as a percentage of revenue) could decrease going forward, the company guided that it would continue to invest in sales and marketing to tap market potential.
Higher forex gains lead to higher net income:
HCL Tech reported forex gains of Rs 2,504 million in Q4FY07 as against a gain of Rs 418 million in Q3FY07, on account of rupee appreciation. The company currently has a forward cover of USD 1.2 billion.
Large deals signed in Q4FY07:
HCL Technologies signed seven multi–year, multi-million dollar deals in Q4FY07. Though the company hasn't disclosed the size of the deals, it did mention that the deals were significantly large in size. In the last few quarters, the company signed a number of large deals indicating that its blue ocean strategy is yielding results.
Guidance shows good revenue visibility:
HCL Tech has guided for a revenue growth of around 30% in dollar terms in FY08E. However, what is more significant is that it has guided to hire a total of 25,000 employees (gross) in FY08E, which is 60% of its current employee base.
Forecast:
We estimate HCL Tech to post a fully diluted EPS of Rs 18.8 and Rs 23.3 in FY08E and FY09E respectively, implying a two-year EPS CAGR of 12.6%. However, we have not taken into account forex gains/losses in FY08E and FY09E. It may be noted that the company had a forex gain of Rs 3.3 billion in FY07. If the forex gains are not taken into account in FY07, HCL Technologies EPS is likely to grow at a two year CAGR of 30%, highst among its peers.
Valuation:
Currently, the stock is quoting at FY08E and FY09E PER (based on post ESOP charged EPS) of 16.8x and 13.5x respectively. We believe that the blue ocean strategy of the company is yielding results leading to HCL Technologies growing faster than its peers. We therefore maintain 'Buy' rating on the stock, with a price target of Rs 368 based on 15x FY09E earnings. At our target price, the stock would be quoting at FY08E and FY09E PER of 18.3x and 15x respectively.
No comments:
Post a Comment