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  1. HCL Technologies growth set to jump on IBM deal, says Motilal Oswal; puts target price at Rs 980

HCL Technologies growth set to jump on IBM deal, says Motilal Oswal; puts target price at Rs 980

HCLT’s Q3FY17 revenue grew 3.0% quarter-on-quarter (q-o-q) CC, slightly ahead of our estimate of +2.1% q-o-q. Notably, growth was broadbased across services, with Engineering leading the pack at 7.1% q-o-q CC and other services growing 2-3%.

By: | New Delhi | Published: January 26, 2017 4:33 AM
HCLT announced its third partnership with IBM for modernisation in areas of application security, B2B data transformation, testing automation and mainframe management. (Reuters) HCLT announced its third partnership with IBM for modernisation in areas of application security, B2B data transformation, testing automation and mainframe management. (Reuters)

HCLT’s Q3FY17 revenue grew 3.0% quarter-on-quarter (q-o-q) CC, slightly ahead of our estimate of +2.1% q-o-q. Notably, growth was broadbased across services, with Engineering leading the pack at 7.1% q-o-q CC and other services growing 2-3%.

With 9MFY17 growth at 12.9% year-on-year CC, HCLT kept its guidance of 12-14% CC growth intact, and should reach the higher end with contributions from two IBM partnerships, Butler America and GEOM integrations in Q4.

EBIT margin was 20.4% (+30bp q-o-q; +90bp v/s our estimate), at the higher end of the guided band of 19.5-20.5%. PAT rose 2.8% quarter-on-quarter to Rs 20.7 billion (v/s est. of Rs 19.7 billion) on account of operating performance beat. HCLT announced its third partnership with IBM for modernisation in areas of application security, B2B data transformation, testing automation and mainframe management.

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Residual contribution from existing partnerships and acquisitions will likely contribute ~4pp to HCLT in FY18, helping deliver double-digit CC revenue growth in next fiscal too. With EBIT margin of 20-20.5% in FY17 (despite 50%+ of contribution from partnerships/acquisitions), we see limited risk to our margin estimate of 19.8% in FY18. Return on significant FY17 investments (acquisitions + three IBM partnerships) heightens the uncertainty, factoring which we value HCLT at 14x FY19E EPS. Our price target of R980 implies 15% upside. Maintain ‘Buy’.

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