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< /font> STOCK UPDATE HCL Technologies
Recommendation: Buy
Price target: Rs900
Current market price: Rs779 Upgraded to Buy with increased price target of Rs900
We recently interacted with Sanjay Mendiratta, head-Investor relations, HCL Technologies (HCL Tech), to gain an insight into the current state of the company's business as well as the concerns over and the impact of the impending US immigration bill. The company remains focused on the re-bid/renewal deal space as it still sees plenty of growth opportunities here at least for the next two years. Moreover, with a well-entrenched presence and proven capability to execute large deals of size of over $200-300 million, HCL Tech is now participating in and getting invited to big-ticket deals of size in the $400-500-million range.
The infrastructure management services (IMS) vertical will continue to drive the incremental growth going ahead, just as it has done for the past eight quarters (the IMS vertical contributed 80% of the incremental revenues in the past four trailing quarters). On the other hand, the information technology (IT) services vertical is likely to remain in soft trajectory on account of the continuing weakness in the discretionary spending (engineering, and research and development [R&D] and enterprise application, 36% of revenues both discretionary in nature). Nevertheless, with signs of improvement in the large integrated deals for application, support and maintenance (ASM), and business process outsourcing (BPO), there could be some improvement in the growth trajectory of the core IT services and BPO businesses.
On the margin side, the management continues to see earnings before interest and tax (EBIT) margin corridor of 19-20% for the coming quarter. However, with the rupee depreciating consistently, the margin could improve further, if the rupee stays at 57-58 a dollar over the coming quarters.
The management acknowledged the potential threat of the impending US immigration bill and expressed concern over the outplacement clause in the current form (we hope for some dilution in the final bill). Nevertheless, among the top four IT companies, HCL Tech is relatively better placed, as around 50% of its total workforce in the USA holds an H1-L1 visa against a higher percentage of H1-L1 visa holders in Tata Consultancy Services (TCS), Infosys and Wipro.
Valuation: HCL Tech remains the best performing stock among the IT pack with an annual return of close to 60%. We remain positive on HCL Tech's earnings predictability over FY2014 and FY2015 driven by the strong momentum in its IMS vertical and its own success in the re-bid market. Further, with consistency in the rupee's depreciation, there is a further potential of an upward revision in the earnings estimates for FY2014 and FY2015. Our current estimates are based on a USD-INR rate of Rs54 and Rs53.5 for FY2014 and FY2015 respectively. We see further upgrades driven by the higher sensitivity of HCL Tech's EBIT margin to the rupee's depreciation. At the current market price of Rs779, the stock trades at 12.7x and 11.7x earnings estimates for FY2014 and FY2015, though we currently maintain our estimates (we will revisit our estimates after the announcement of the Q4FY2013 results). We expect a potential earnings upside post-currency reset. Thus, we have upgraded our rating on HCL Tech from Hold to Buy with an increased price target of Rs900 per share. Gateway Distriparks
Recommendation: Buy
Price target: Rs163
Current market price: Rs110 Norwest Venture Partners to invest in Snowman Logistics
Norwest Venture Partners to invest Rs60 crore in Snowman Logistics Ltd; GDL to remain promoter
Gateway Distriparks Ltd (GDL) and its subsidiary, Snowman Logistics Ltd (SLL), have today executed a share subscription agreement with Norwest Venture Partners (NVP), pursuant to which NVP will invest Rs60 crore (1.7 crore shares at Rs35/share) in SLL by subscription to SLL's equity shares.
Along with it, GDL will acquire 5% shareholding in SLL from the International Finance Corporation (IFC) for a total consideration of Rs18 crore (GDL's acquisition at Rs35/share). Following the completion of the GDL's acquisition and the NVP's investment (the transactions), NVP will hold 14.3% stake in SLL. The shareholding of GDL will come down from 53% to close to 51% of diluted equity base.
Outlook and valuation
We continue to have faith in GDL's long-term growth story based on the expansion in each of its three business segments, ie container freight station (CFS), rail transportation and cold storage infrastructure. Also, a revival in the export-import (EXIM) trade would augur well for the company. At the current market price, the stock trades at 8.1x and 6.2x its FY2014E and FY2015E earnings. We maintain our Buy recommendation on GDL with the price target of Rs163.
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