ICICIdirect.com`s research report on HCL Technologies “HCL Tech reported subdued Q1 earnings. Dollar revenue growth was led by the US, retail, manufacturing and financial services. US$ revenues grew 1.9% QoQ to $1,433 million but were below our $1,448 million estimate (constant currency revenues grew 3.2% QoQ). EBIT margins (23.9%) were impacted by a partial wage hike but were in line with our 24.0% estimate. Reported PAT of Rs 1,873 crore was above our Rs 1,750 crore estimate led by higher other income. The company announced a dividend of Rs 6/share for Q1FY15.” “Q1FY15 constant currency growth (CC, 3.2% QoQ) was driven by ER&D services (8.1% QoQ) and infrastructure services (IMS, 3.6%) with a healthy recovery in enterprise system integration (5.1%) likely led by business intelligence, analytics services and Gen2 markets. Application services (27.7% of revenue) declined 0.7% QoQ and dragged overall core software growth (2%) – which continues to be uneven (grew 1.5% CQGR during Q1FY13–15 and 2.2%, 2%, 2.5% and 0.9% in Q4, Q3, Q2 and Q1FY14, respectively). Further, sequential growth in IMS in Q2 was the slowest since Q2FY12 and seems to have moderated sharply from the average 6.9% reported in Q3FY12-Q1FY15. This despite signing deals worth $8 billion+ in the past eight quarters with a significant proportion of them being in IMS. Recall, 44% of incremental revenues in FY08-14 were contributed by IMS as its contribution as a percentage of revenues rose 19 percentage points (pp) during the same period.” “We continue to believe HCLT’s current one-year forward PE multiple is inexpensive considering it represents a modest 10% premium relative to its five-year (FY09-14) average (12.5x), despite delivering 38% earnings CAGR (25% revenue growth, average 18.2% EBIT margins) over the same period and expected revenue, earnings CAGR of 12% each in FY14-16E (average 23.1% margins in FY15-16E). Consequently, we continue to value HCLT at 15x FY16E EPS of Rs 113 to arrive at our target price of Rs 1700,” says ICICIdirect.com research report.
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