Revenue growth slowing; UBS maintains ‘SELL’ on HCL Tech

NEW DELHI: HCL Technologies dipped nearly 9% to Rs 401.40 on Tuesday after reporting a 2.7% quarter-on-quarter drop in its consolidated net income to Rs 496.70 crore in the first quarter ended September 30, 2011, as per US accounting standards. Its net profit stood at Rs 510.5 crore in Q4, FY'11.

Brokerage firm UBS has downgraded the stock on account of slowing revenue growth as compared to TCS and Infosys. The brokerage maintains ‘SELL’ rating on the stock with a target price of Rs 380.

“We believe faster revenue growth has been the primary reason behind stock price upsides for HCL Tech in the past, given that margin performance in FY11 has been lacklustre. With revenue growth slowing down, we see no reason to prefer HCL Technologies over Infosys, TCS,” says a UBS report.

HCL, which counts Microsoft, IBM, HP and Oracle as partners, said its revenues stood at Rs 4,651.3 crore during the reporting quarter, up 25.4 per cent from Rs 3,708.1 crore in Q1, FY'11.

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In dollar terms, HCL Tech reported 1Q revenue of US$1bn, up 4.1% QoQ, in line with estimates. However, infrastructure services slowed down to 4.3% QoQ growth (US$246m) after over 11% average QoQ growth for the last 10 quarters.

“Dollar revenue growth at 4.1% was lower than 4.5% reported by Infosys and 4.7% for TCS. We note that HCL Tech’ revenue outperformance to Infosys and TCS has slowed over the last few quarters,” said the UBS report.

“We also note that revenue momentum for HCL Tech has followed a tightening in sales & marketing expenditure over the last few quarters – 4.4% in 1Q FY12 from 15.4% in 1Q FY11 and 13.9% in 4Q FY11,” added the report.

Other brokerage view:

Prabudas Lilladher recommends ‘Buy’ with a target price of Rs 550

HCL Tech reported mixed-bag, lower than expected revenue growth of 4.1% QoQ in USD terms for Q1FY12, but better than expected margin. We reiterate our “BUY” with a target price of Rs550.

IDFC Securities maintains ‘Neutral’

Revenue growth of 4.1% q-o-q in USD terms (5.1% in constant currency terms) was below expectations. However, EBIT margin decline of 120bp q-o-q was is in line with expectations.

After a few quarters of consistent earning surprise, HCL Tech has missed revenue growth and street expectations. In current challenging macro environment, we recommend sticking only to top few players such as TCS and Infosys; HCL Tech stock is ‘Neutral’ rated.

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