HCL Technologies (HCL) reported strong results for the quarter and the year ended June 2008. Top line recorded a sequential growth of 11.5% to Rs21.7 billion driven by appreciating dollar and the modest volume growth.
EBITDA margin increased by 117 bps q-o-q to 23.4%, led by an improved operational efficiency and a decrease in the cost of revenue, which helped in offsetting the increase in SG&A expenses.
Taking into account a weak macroeconomic environment, we have cut down our revenue estimates by around 1.5% to 27.2% for FY09E as the company witnessed a strong deal inflow throughout the year. Besides, we expect the billing rate to remain stable for FY09.
Moreover, with a stable operating performance including the utilization rate, attrition levels, contribution from the US, we expect margins to remain around its historical level of 22% for FY09. However, in order to explore new markets and services, SG&A might increase, which may put margins under pressure.
Outlook and valuation
We believe that HCL’s fundamentals remain stable in the backdrop of difficult macro-economic environment.
Besides, due to the stock’s sharp decline of ~23% since our last update, it trades at a large discount of ~29% to the average Industry multiple.
Based on DCF valuation, we have arrived at a target price of Rs316, assuming a Rf of 9%, terminal growth of 5%, and a WACC of 15.1%, which provides an upside of 37% over the current levels. We maintain our BUY rating.