HCL Technologies: Remains our top pick High degree of growth comfort and attractive valuations; Buy: Nomura Research

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Action: Best segmental mix from a growth perspective among tier 1 IT

Despite caution on 3QF margins (management indications of EBIT margins in

the range of 21-22% vs 23.8% in 2Q), we believe higher growth comfort would

outweigh near-term margin caution. We find HCLT best positioned in terms of

growth among tier 1 IT given 58% of revenues are from fast growing segments

for the industry like IMS (fastest growing segment for Indian IT which benefits

from USD190bn of deal rebids over CY15/16), engineering services (largest

player and positive trends as in IMS in terms of larger deal flow, full service

outsourcing and market share gains are starting to play out) and BPO (better

participation is driving growth). After the stock correction of 10% from its

recent peak, valuations of ~14x FY17F EPS are attractive, in our view. We

look for higher-than-tier-1-IT (excluding CTSH) USD revenue CAGR of 14%

over FY15-17F and value HCLT at parity with INFO on better revenue/EPS

growth and higher growth comfort.

Catalysts: Continued momentum in IMS and engineering services

3QF: Likely strongest organic constant currency growth of 3.5%

For 3QF, we expect HCLT to lead its peers on growth and look for USD

revenue growth of 0.7% q-q (constant currency growth 3.5% q-q) and 160bps

q-q EBIT margin decline to 22.2% on account of impacts from wages, cross

currency and investments. Management commentary on IMS, engineering

services as well as medium-term margin outlook will be keenly watched.

F16/17F EPS cut by 4%/3%; TP raised to INR1,100

Our FY16/17F EPS estimates are cut by 4%/3% to account for cross currency

and investment impacts. We look for 14% USD revenue CAGR, EBIT margin

decline of ~100bps to 22% and ~13% EPS CAGR over FY15-17F. We raise

our target multiple to 17x (vs. 16x earlier) on better growth comfort relative to

peers. Our TP is based on 17x 1-year forward EPS (up to Mar-17) of INR64.3.