HCL Technologies Ltd (HCTL)…Q2FY15 Pre-quarter earnings update; Maintain HOLD with target price to Rs.1,697 :: IndiaNivesh

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HCL Technologies Ltd (HCLT) announced Q2FY15 (June Ending) business update.
The key highlights were following: (1) Cross-currency impact, (2) INR depreciation
impact, (3) Treasury Income Status, (4) Ex. One-offs impact on the bottom-line,
and (5) Effective Tax-rate.
Cross-Currency may hamper $-revenue performance…
 On account of strengthening USD relative to the global currencies, HCLT
management expects adverse cross currency impact of 210 bps in Q2FY15
(June End). In our opinion the seasonal weakness and higher cross currency
impact is likely to result in $-revenue growth of 1.7% Q/Q in Q2FY15. In
Q1FY15, HCLT posted 2.0% Q/Q $-revenue growth, partially offset by 130 bps
adverse impact of cross currency. The $-revenue growth was driven by IT
services (+2.0% Q/Q), and Infrastructure (+1.9% Q/Q), partially offset by BPO
(-0.1% Q/Q).
Chart: Revenue Geo-wise Chart: Revenue Growth Trend (Q/Q %)
Source: Company Filings; IndiaNivesh Research
INR depreciation could lead to exchange gain…
 The depreciation of INR (v/s USD) could lead to foreign exchange gain of $2.0
mn (Rs.122 mn) largely occurring from cash flow hedges and mark-to-market
of assets and liabilities. In Q1FY15, the company reported foreign exchange
loss of $8.7 mn (Rs.530 mn). Additionally, management expect lower treasury
income (down ~5% Q/Q to $31.7 mn v/s $33.4 mn in Q1FY15).
Chart: Exch Gain/(Loss) Trend (Rs Mn) Chart: INR v/s USD Trend
Source: Company Filings; IndiaNivesh Research
Bottom-line to be lower Ex. One-offs…
 In Q2FY15, net income would be lower by $25.2 mn (~Rs. 1553 mn) on account
of sale of property, which was one-off event in Q1FY15 not likely to repeat in
this quarter. The company reported net income of Rs.18,740 mn (21.5 % net
margin) in Q1FY15. Excluding the capital gain of ~Rs.1,553 mn, net income
was Rs.16,793 mn (19.2% of net margin). We expect net income of Rs.18,017
mn (20.3% net margin) in Q2FY15. During the quarter, the Company expects
effective tax rate to be in the range of 21-22%.

Valuation
At CMP of Rs.1,553, the stock is trading at 14.7x FY15E (June YE) and 12.5x FY16E
(June YE) EPS estimates. We like the company’s performance in Software vertical;
however ability to maintain its margin post software vertical revenue expansion
remains the watchable going-ahead. We maintain HOLD with target price to Rs.1,697
(valuing at 14.7x FY16E)