HCL Technologies, Bharat Bijlee

HCL Technologies
Cluster: Apple Green
Recommendation: Buy
Price target: Rs395
Current market price: Rs300

Beaming with confidence

Result highlights

• HCL Technologies has reported a revenue growth of 2.2% quarter on quarter (qoq) and 28.6% year on year (yoy) to Rs1,612 crore for the fourth quarter ended March 2007. For the fourth consecutive quarter, it has reported close to double-digit sequential growth in revenues in dollar terms (up 9.2%). The sequential growth was driven by a 6.6% growth in volumes, a 1.7% improvement in the blended realisation and a one-time income (0.9%). However, the appreciation in the rupee by close to 7% limited the growth in revenues in rupee terms.
• The earnings before interest, tax, depreciation and amortisation (EBITDA) margin declined by 170 basis points to 21.6% on a sequential basis, due to the adverse impact of the steep appreciation in the rupee (a negative impact of 300 basis points) and higher selling, general and administration expenses (up by 60 basis points as a percentage of the sales) and unfavourable revenue mix (a negative impact of 30 basis points). This was partially mitigated by better realisation and an improvement in the utilisation rate. Consequently, the operating profit declined by 5.3% to Rs347.4 crore.
• However, the five-fold jump in foreign exchange (forex) fluctuation gains to Rs250.4 crore (up from Rs41.8 crore in Q3FY2007) and 87.3% growth in the other income component to Rs36.9 crore enabled the company to post a robust growth of 46.7% qoq and 108.9% yoy in its consolidated earnings to Rs486.7 crore. The company had taken an aggressive forex cover of $900 million at the beginning of the quarter, which was further increased to $1.16 billion as on June 30, 2007.
• In terms of operational highlights, the company signed seven large deals (multi-million, multi-year) during the quarter. The deals are spread across geographies and industry verticals, reasserting the company's positioning as a strong contender for total outsourcing deals. Encouraged by the continued flow of large deals and the consequent growth momentum across the service lines, the management has given a broad guidance of a 30% growth in revenues (in dollar terms) for the next two years.
• To factor in the appreciation in the rupee and the charges related to the employee stock option scheme ($24 million in FY2008 which was not factored in earlier), we have revised downward our earnings estimate for FY2008 by 11% to Rs18.4 per share. However, the earnings estimate for FY2009 remains unchanged at Rs23.8 per share. We maintain our Buy recommendation on the stock with a price target of Rs395.

Bharat Bijlee
Cluster: Apple Green
Recommendation: Buy
Price target: Rs2,425
Current market price: Rs2,145

Beating all expectations with 62% growth

Result highlights

• Bharat Bijlee Ltd (BBL) has once again delivered a spectacular performance. Beating all market expectations its revenues grew by 62.8% to Rs115.6 crore in Q1FY2008.
• The operating profit moved up smartly by 161.5% to Rs19.9 crore, translating into an operating profit margin (OPM) of 17.2%. The OPM expanded by an impressive 650 basis points. The profit after tax (PAT) jumped by a whopping 194.4% to Rs12.6 crore, resulting in earnings per share of Rs22.5.
• The increase in the revenues and profits was due to improved realisation in both transformer and motor businesses. The margins expanded on the back of a lower cost-to-sales ratio. The raw material cost-to-sales ratio declined by 410 basis points to 65.2% during the quarter.
• The interest cost declined by 13.1% to Rs0.9 crore while the depreciation charge grew by 48.1% to Rs0.8 crore.
• At the end of the quarter the order backlog of BBL stood at Rs300 crore with the majority of the orders coming for transformers (about 65-70%).
• At the current market price of Rs2,145 the stock is discounting its FY2008E earning by 15.8x and FY2009E earnings by 11.7x. The stock is trading at 8.4x FY2008E enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) and 6.0x its FY2009E EV/EBIDTA.