Buy HCL Tech, target of Rs 235: Motilal Oswal

HCL Technologies 1QFY09: Below estimates; US$ revenues flat QoQ; margins down 100bp: HCL Tech
reported flat QoQ US$ revenue growth at US$505m (v/s our est. of US$534m). The revenues were negatively
impacted by: (1) degrowth with respect to a BFSI client (US$10.5m), (2) loss of revenue in voice-based BPO client
(US$4.5m); and (3) cross currency impact (~US$9.9m). Revenues of the current quarter include BPO acquisitions
(Liberata and Control Point) consolidated during the quarter to the extent of US$6.8m.
? Deal wins strong, bidding for US$2b worth deals: HCL Tech won 8 deals worth US$270m in 1Q, indicating a
strong demand pipeline. Client addition at 29 was flat QoQ with 4QFY08 addition of 30 clients. According to
management, ~US$2b deals are close to being finalized over the next 3 months (higher versus normal times), suggesting
that clients are looking at IT spending as a cost rationalization measure in the current crisis. Revenues could receive
a boost if the company emerges a winner in even a fragment of these deals. The company hired 2,124 employees in
IT services compared with almost nil in 4QFY09, indicating good visibility for 2QFY09.
? Downgrading estimates for FY10: We are downgrading our FY09 US$ revenue growth estimates by 6 percentage
points to 15% from ~21%, on account of renewed concerns about demand visibility and cross currency volatility. Our
rupee estimates would have a muted impact owing to our revised INR/US$ assumptions. Our FY09 EPS stands
revised to Rs26.1 from Rs23.2 and for FY10 to Rs24.8 from Rs25.6. Management’s assurance of maintaining the
dividend policy (600% annualized), is expected to protect the downside in the stock. Currently, the dividend yield
works out to ~7.5%. At the current market price, HCL Tech is trading at 6x FY09 and 6.3x FY10 earnings respectively.
Maintain Buy.