HCL Technologies- 3Q cements our positive view:: Macquarie Research,

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HCL Technologies
3Q cements our positive view
Event
 Better than expected results and sequential margin expansion lifted HCLT
stock price by 10% (vs. 2% for BSE Sensex) on Thursday. We retain our
street high estimates on the company and reiterate OP. Our unchanged target
price of Rs615 implies further 17% upside after today’s rally.

Impact
 Profit growth now reflecting top-line performance. Despite positive
momentum on top-line, investor confidence on the name was missing in
earlier quarters due to subdued margins. With 130bp QoQ improvement in
EBIT margins in 3Q, we believe the company has set base for sustained
improvement in profitability heading into FY12. Management will likely lay out
its FY12 margin guidance next quarter. We believe the company has enough
levers (mainly pricing and robust growth in the Infrastructure services) to
deliver 15%+ EBIT margins in FY12.
 BFSI momentum coming from Europe and Asia Pac. BFSI vertical had
shown flat QoQ growth at Infosys results last week. This had raised concerns
on the growth outlook in the largest IT spending vertical of Indian vendors. We
learnt from HCLT management that the strength in the performance of this
vertical for them was driven by clients based in Europe and Asia Pac. HCLT
believes the growth in this vertical is largely driven by the integration projects
and upside from regulatory work is not material.
 BPO transition – on track vs. previous guidance. 3Q BPO revenues were
US$50m (up 1% QoQ). EBIT loss for the quarter was US$4.5m and
management reiterated its comment to achieve break even in this segment by
3Q FY12.
 3Q results detail. HCLT reported US$ revenues of US$914m (up 5.8%
QoQ), 1% ahead of our estimate. In rupee terms, the company delivered
revenues of Rs41.3bn (up 6% QoQ and 35% YoY), EBITDA of Rs7.1bn (up
13% QoQ and 18% YoY) and PAT of Rs4.6bn (up 17% QoQ and 36% YoY.
Refer Figures 4 and 5 for details
Earnings and target price revision
 No change. Our FY12 EPS continues to be at the top-end of the street and
expect solid 3Q to drive earnings upgrade.
Price catalyst
 12-month price target: Rs615.00 based on a DCF methodology.
 Catalyst: Deal wins in infrastructure management and uptick in EAS offering
Action and recommendation
 Reiterate OP. The stock is currently trading at one year forward PER of ~15x
undervaluing the 40% earnings growth in FY12.