HCL Tech Q3FY10 Result Update ; Delivers better than expectations

HCL Tech reported revenues of US$ 685 mn (+5.1% QoQ), at the top end of peers reported till date with IMS continuing to drive growth at 15% QoQ and core S/w growth also picking up at 4.2% sequentially. BPO continues to be sluggish with revenues declining by ~10% sequentially and we do not see a sharp recovery in BPO’s business prospects either.EBITDA margins declined by ~130 bps QoQ to 19% (V/s expectations of ~100 bps decline) and we would not be too worried despite concern on the same from some quarters of the street as operational improvements on the Apps and the IMS segment continue to take care of the BPO transition

We upgrade FY11/12 earnings estimates by ~5.2%/4.6% to Rs 26.3/Rs 29.9 (V/s Rs 25/28.6 earlier) as we now build in a FY11/12 revenue growth of 19.7%/18.8% ( V/s 15.6%/17% earlier). Retain ACCUMULATE with a revised target price of Rs 430 (V/s Rs 400 earlier). Valuation discount at ~30%+ given decent operational show and improving prospects continue to tilt us towards a case for sharp out performance V/s peers.