'Buy' rating for HCL Technologies, on track to deliver: Edelweiss

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SummaryHealthy deal win momentum despite intense competition

Our channel checks on the demand scenario, particularly in the European region, cement our confidence in HCL Technologies (HCLT), as incrementally most of the deals include IMS component. This entails robust growth for the company as IMS (infrastructure management services) has been a key growth area over FY09-13 (40% CAGR). Additionally, the company’s deal wins momentum has been healthy despite intense competition. Further, absence of pressure on the supply front emboldens us to rule out any negative margin impact in the near term. Our positive stance on HCLT stems from our confidence that it will benefit from deal flows in IMS, spurring 15% USD revenue growth in FY14e (estimates) and FY15e each. Maintain ‘Buy’ with target price of R1,359 (15x FY15e EPS).

IMS continues to spur deal traction

Our channel checks indicate robust deal flows, particularly in the IMS space. Deal wins for HCLT too have been healthy despite intensified competition. Also, ramp-up of deals won earlier are on track (won deals with a TCV of over $4 bn in past four quarters), which will spur revenue growth in the coming quarters. This makes us optimistic that the company is on track to post 15% revenue growth in FY14e and FY15e each.

HCLT’s performance in the IMS segment has been stellar and it has outpaced peers. Further, most delays coming up involve IMS component, particularly in Europe, as clients are facing cost pressures. The company has proven leadership in this space and stands to gain from the improved demand. Further, demand is coming in RTB (run the business), which is annuity based and hence imparts stickiness to revenue. Based on the sustainable demand traction and HCLT’s presence, we maintain our revenue growth estimate of 15% for both FY14 and FY15. HCLT is also focusing on increasing automation of processes and platforms.

No imminent margin risk

HCLT’s margins have been superlative over Q1FY12-Q1FY14 (920bps expansion), largely driven by ramp up of deals and currency benefit. In the absence of supply-side pressure, we do not anticipate any headwind to margin, precluding the need to step up lateral hiring. However, any spike in demand could dent margin as the company is running at 85% utilisation.

Outlook and valuations: On a strong footing; maintain ‘BUY’

We remain positive on HCLT and expect it to be the prime beneficiary of rising IMS spends. No imminent margin risk in the near term is the key trigger for stock performance. Rising demand traction

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