Nomura: Buy HCL Technologies

Competing on MNC turf
 Best suited to compete with MNCs in deal
renegotiations
We believe HCL Tech’s deal prowess, strength in IMS (a key element
in upcoming deal renegotiations) and comparable margin
expectations to MNC peers in the segment make it the best-suited
Indian vendor to compete with MNCs in deal renegotiations. Its
trailing-quarter EBIT margin in IMS is 15% (vs 15.9% for HP Services,
13.2% for Accenture and 14.8% for IBM in IT services business).
 Broad-basing of growth across service lines
Strong demand traction in Infrastructure management services,
coupled with improving discretionary traction leading to revival in
enterprise application (EAS) and engineering services (ERS) demand,
means ~64% of the company’s revenue is either continuing to grow or
accelerating, on our reading. We expect the revenue drag from BPO
to ease. HCL Tech has been the fastest-growing vendor in IMS in
recent quarters, and has shown near double-digit q-q growth in EAS
and ERS in 4Q FY10.
 Operational levers still to be exercised
We believe HCL Tech still has operational levers on utilisation,
offshoring, easing drag from BPO operations, and improvement in its
bulge mix (fresher:lateral) as contracts stabilise. Exercising of these
levers could provide upside to our estimates. The company currently
considers these investments to be a key competitive advantage.
 Valuation discount to narrow on better EPS growth
We expect HCL Tech to post comparable growth to our top-tier IT
universe and deliver a better-than-peer-group EPS CAGR of 33.1%
over FY10-12F. We expect its valuation discount of ~30% to Infosys
to narrow to the historical level of ~20%. We lift our PT to Rs510
(previous Rs450), based on 16x one-year rolling forward earnings.