Sunday, January 10, 2010


Interaction with mgmt increases our confidence
Our recent talk with Anil Chanana, CFO, grew our confidence regarding a demand revival. We believe HCL Tech will be able to at least match its larger peers in USD revenue growth, and that our previous estimates of 2.0-3.0% q-q growth through FY11 (versus 3.0-3.5% for peers) may prove conservative. As a result, we raise our FY10-11 revenue and EPS estimates by a modest 1-2% and 2-5%, respectively. HCLT shares have returned 18% since its 1QFY10 results (versus the Sensex which is up 11%), but we believe that there is more steam left given our revised TP of INR420.00. We see HCL Tech as a credible alternative to the larger names, where valuations seem stretched. Furthermore, in the likelihood of a strengthening USD/INR environment over the next few quarters, HCL Tech’s earnings are better protected as lower INR revenue would be offset by fewer hedging losses.

What’s new? New deals, EAS recovery signs, BPO reorg.

1) HCL Tech’s deal flow has started to pick up after a relatively quiet two quarters even as several of the USD2.65b deals signed in FY08-09 (with Nokia, Xerox, Viacom, etc, Exhibit 5) have begun to contribute steadily. We estimate that in the December quarter, HCL Tech may have won about USD350m of new deals. 2) Infrastructure services (19% of rev., doubledigit
q-q growth in the past two quarters) may continue to provide an edge. Management sees about USD60b of deals being renewed globally over the next 2-3 years, a significant portion of which would require infrastructure services. 3) We believe Axon can prove to be an important asset in FY11. The enterprise application services (EAS) market is showing signs of an early recovery (e.g. HCL Axon’s recent SAP implementation deal win with GSK). We also see HCL Tech and Axon increasingly cross-selling their services to accounts beyond EFH Oncor and Dr. Pepper. 4) The BPO restructuring is on track – the enhanced Liberata insurance platform has led to a USD200m deal from the UK-based Equitable Life, its first customer since the July 2008 acquisition. Furthermore, the Control Point business now has a new CEO, Rick Valencia, a well-regarded industry veteran, as HCL Tech intensifies its efforts to improve its US BPO operations.

Raise TP to INR420.00, more steam left in the rally
We raise our DCF-based December 2010 TP to INR420.00 (Exhibit 7) from INR365.00 set for June 2010. Our target price implies an FY11 P/E of 15.3x, which is still at a significant discount to the larger peers which are trading at 19-22x. If we exclude the forex losses to normalize our FY11E EPS, our implied target FY11E P/E is even lower at 14.0x.

To read the full report:HCL TECHNOLOGIES