28

Pick of the Week

The Economic Times Wealth, July 11-17, 2016

HCL Tech: Rebooting growth

Long-term investors can use the current price correction to buy the stock.
s visible from the relative performancevaluato clearly quantifiable factors such as margin-dilutive actiontable, the market has severely punished
quisitions (acquisitions that reduce the average margin of
HCL Technologies in recent months. Three
the acquirer) and low-margin mega deals such as Geometric
factors have contributed to its derating. First,
and Volvo.
the slowdown in the companys infrastructure
HCL Tech has signed seven large deals worth $2 billion in
services business that contributes around 36% to HCL
the January-March quarter. In addition to helping the comTechs revenue. Second, the companys margin contracpany improve its credentials, these mega deals are adding to
tionmargin has contracted in the
its order book and should help imJanuary-March quarter compared to
prove its growth rates. Though the
same period last year. Third, investor
margin may contract a bit, HCL
sentiment has also taken a hit beTechs strategy of focusing on mega
cause of the managements decision
deals may help it to break out of the
to stop giving margin guidance.
slowing growth trend and raise
Even as HCL Techs growth from ingrowth rates to match the best in the
39
frastructure services business came
industry.
Buy
5
down in 2015-16, it was still able to reAfter the recent correction, reasonSell
port the fastest growth among peers.
able valuation is another factorit is
This indicates that HCL Tech was able
the cheapest stock among the top five
to withstand the increased competiIndian IT services companiesthat is
tion in the space. The concern about
driving more analysts to the buy side
Indian IT companies losing their grip
in this counter.
10
over infrastructure services business
Hold
is also unwanted. Though there is a
Selection Methodology: We pick the
structural slowdown in infrastructure
stock that has shown the maximum
services business because of the shift
increase in consensus analyst rating
towards cloud-based computing, the
in the past one month. Consensus ratFocus on large deals, a strong hold in the
market share of Indian IT companies
ing is arrived at by averaging all anainfrastructure services business and
in this space is still low and, therelyst recommendations after attrib-utreasonable valuations have made the
fore, is likely to remain as its main
ing weights to each of them (5 for
company analysts favourite.
area of growth. And, due to HCL
strong buy, 4 for buy, 3 for hold, 2 for
Techs strong hold in the infrastrucsell and 1 for strong sell) and any imture services business, analysts are hopeful that its growth
provement in consensus analyst rating indicates that the anwill accelerate in 2016-17.
alysts are getting more bull-ish on the stock. To make sure
Margin contraction and the managements decision to
that we pick only companies with decent analyst coverage,
stop giving margin guidance have increased the investors
this search is restricted to stocks that are covered by at least
worries. However, analysts feel that there is no margin
10 analysts. You can see similar consensus analyst rating
uncertainty for HCL Tech. The expected margin contracchanges during the past week in the ETW 50 table..
tion of around 100 basis points, in the coming years, is due
Narendra Nathan

Analysts views

Actual
2014-15
Revenues (` cr)
36,701.22
Operating profit (` cr) 8,069.89
Net Profit/Loss (` cr)
7,317.07
EPS (`)
52.09

Consensus estimate

2015-16
40,913.00
8,226.00
7,354.00
52.25

2016-17
46,703.71
9,155.93
7,934.14
55.61

2017-18
52,203.35
10,389.75
8,929.54
62.81

PBV
4.70
6.11
4.65
8.13
5.01
3.38

PE
13.91
17.21
19.70
19.70
15.28
15.53

Dividend
yield (%)
4.18
3.85
2.10
1.79
1.13
1.07

Valuation
HCL Technologies
Hexaware Technologies
Infosys
Tata Consultancy Services
Zensar Technologies
Wipro

Latest brokerage calls

Reco date
7 July 16
4 July 16
4 July 16
1 July 16
30 June 16

Research house
Angel Broking
Nomura
ICICI Securities
Credit Suisse
Edelweiss Capital

Advice Target price (`)

buy
1,000
buy
950
buy
935
outperform
1,050
buy
1,065

Relative performance
Market price: `717

96.56

100

76.37
7 July 2015

Sensex

HCL Tech

7 July 2016

Performance of HCL Tech compared with the Sensex.

Figures are normalised to a base of 100. Source: ETIG Database & Bloomberg

What experts advise

BUY
Stock

Fundamentals

Research house

Advice

Market
price* (`)

Target
price (`)

Comment

Coal India

Nomura

Buy

315.45

365

Maintain buy. The uptick in year-on-year growth in production and

offtake in June 2016 is positive. Expect coal production and offtake
growth to be higher in first quarter of 2016-17.

Skipper

Motilal Oswal

Buy

162.25

215

Retain buy. Skipper will report a 22% revenue CAGR and 32% net
profit CAGR between 2015-16 and 2017-18 and, therefore, see
potential for a further rerating in the counter.

Redington India

ICICI Sec

Buy

103.60

141

Maintain buy. Valuation is attractive. Company also has several

growth leversincreased demand for enterprise solutions, ramp up
in smartphone clientele and expansion in logistics business.

V-Mart Retail

Religare

Buy

489.25

620

Retain buy. V-Mart currently trades at a PE ratio of 15.1-times its

earnings per share in 2017-18, which is attractive, given its solid
growth prospects and improving return ratios.

ICICI Bank

Edelweiss

Buy

244.85

339

Maintain buy. Despite the asset quality issues, ICICI Bank continues
to strengthen its franchise and this should yield healthy normalised
return ratios in future.

SELL
Stock

* Market price as on 7 July

Research house

Advice

Market
price (`)

Target
price (`)

Comment

M&M Fin

J P Morgan

Underweight

350.15

300

Retain underweight. Share price has rallied big in anticipation of an

above-average monsoon this year. While good monsoon is important,
other factors needed to sustain high credit demand are missing.

Titan Company

IDFC Sec

Underperformer

402.85

321

Maintain underperformer. Given likely risks to its growth, the riskreward ratio is unfavourable at the current valuations of 35-times its
expected earnings per share in 2017-18.