HCL Technologies (HCLT’s) Q4FY08 results were better than our estimates on the operational side.
Revenues grew by about 12% quarter-on-quarter with EBIT rising by about 19%. The company reported forex loss of about Rs3 billion.
One out of the two impacted accounts has reduced business in latter part of Q4FY08. This will impact revenue growth in BFSI in near term. However, telecom revenue growth is expected to compensate due to large account wins and scale ups
Management indicates pricing pressure but company managing to maintain margins by adopting output based pricing and fixed priced pricing.
While the company has been able to protect overall margins by offering output based pricing and shift work off-shore, we view this as a concern and would watch this element closely.
EBIDTA margins improved over the previous quarter on the back of rupee depreciation and better employee utilization
Utilization levels have reached a peak and also there may not be further leverage on SG&A expenses. The company has also indicated pressure on billing rates.
We have made suitable changes in our earnings estimates to take into account the Q4FY08 results. We expect the company to report an EPS of Rs22 in FY09. This is after assuming a further 2% equity dilution in FY09 due to ESOPs.
At our price target of Rs347, FY09E earnings will be discounted by 15.5x, a discount to peers. A prolonged recession in major user economies and a sharper-than-expected appreciation in rupee v/s our assumptions of Rs.38.25 by FY09 end are the key risks to our call.