Goldman Sachs,: HCL Tech: Highest EPS CAGR of 27%; raise ests and TP

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HCL Tech (HCLT.BO): Highest EPS CAGR of 27%; raise ests and TP
What’s changed
 We reiterate our Buy rating on HCL Technologies as we believe that
HCLT is well positioned to deliver revenue growth of 21% and EPS
CAGR of 27% over FY10-FY13E, on par with industry leaders over
the next two to three years.

 HCL has been able to capture 19% of all the incremental revenue
registered by the four large cap companies in the sector over the
last 10 quarters. The last two quarters have shown double digit
sequential revenue growth on average through significant ramp up
in projects. We expect HCL to show strong topline growth over the
next few quarters as deal wins ramp up and translate to revenues.
 We believe that with 240bp compression in 1QFY2011, EBIT margins
have bottomed out for HCL. We expect margins to recover over the
next two to three quarters due to normalization of attrition and wage
levels, recovery in BPO business, higher offshore mix, stabilizing
SG&A and scale benefits and operational leverage.
 With the beginning of 2011, HCL’s earnings will no longer include
the legacy hedging losses on forex derivatives which have masked
the operating profitability of the company for the last two years
resulting in accentuated valuations.
 Raise revenue and earnings estimates: We revise our revenue and
EPS estimates by 2.5%-9.5% and 2.6%-10.1% over FY11E-FY13E to
reflect the sustained revenue growth and improving margin outlook.
We forecast HCLT to post revenue CAGR of 21% over FY10-FY13E.
Valuation
 We raise our Director’s Cut based 12-month target price to Rs574
(from Rs492), implying 23% potential upside. Our TP implies a P/E of
17.6X on FY2012E EPS of Rs32.6, a 23% discount to our large cap
Indian IT services coverage.
 Still at discount to its own trading history: HCL is trading at
14.2X FY12E P/E, which is a 5% discount to its 5-year historical
trading average of 15X. The stock is trading at a 31% discount to its
large-cap peers which is higher than the 5-year historical average of
21% discount. In our view, this discount is not justified given the
strong revenue and earnings CAGR of 21%/27% (large caps at
22%/19%) that we expect over FY11E-FY13E.
Key risks
 Slower-than-expected economic recovery, INR appreciation.