HCL Technologies: Buy

Investors with a one-to-two-year horizon can buy the shares of HCL Technologies (stock), which currently trades at Rs 277, given the strong growth prospects for its business and reasonable valuations. The stock trades at 16-17 times its trailing 12-month earnings which is a discount to its Tier 1 peers such as Satyam and Wipro. Despite being among the top five IT services companies, it has maintained a relatively low profile. The recent fall in the markets has rendered the HCL Technologies stock a potentially attractive investment, capable of providing long-term capital appreciation.

Business Analysis

Strategic business approach: HCL has taken a holistic approach towards its service offerings. It is focusing on acquiring multi-million dollar clients, with multiple service offerings to these clients over many years. This means that i nstead of taking up one-off engagements HCL is attempting to win high-value clients to whom it can offer an entire gamut of services.

This will provide sustained revenue streams over several years with the potential for maintenance and support revenues as well. This will also mean that its execution capabilities will be substantially honed over time and will give it the edge in approaching new clients. The company signed seven such multi-million, multi-service, multi-year contracts recently (one of them being a $35-million deal with New Zealand’s Fonterra), which augurs well for revenue growth.

Tactical approach to IMS: Infrastructure management services (IMS), a key offering of the company (generating $200 million revenue and growing at over 70 per cent), has seen HCL adopt a different approach. It has adopted an ‘ass et light’ and ‘vendor neutral’ approach. This implies that the company will focus on management and support services rather than provide equipment for IT infrastructure.

IMS being a key, high-revenue earning service for the company, separating the hardware aspect (which is a low-margin business) was necessary. This focus on the services part could help HCL improve its profit margins. The company has strong relationships with major IT hardware providers with whom it can partner when clients insist on a bundled service.

Verticals in focus: HCL is experiencing strong growth in its high-tech vertical, which comprises aerospace and automotive clientele, among others. This vertical has contributed 28.7 per cent of its revenues (2006-07), the same proport ion as the Banking and Financial Services, Insurance (BFSI) vertical. The telecom vertical is also contributing substantially to revenues (17.2 per cent). These two verticals have seen growth in excess of 50 per cent over the past year.

This is important on two counts. One, these two verticals are seeing increasing spends on technology upgrade, value-added services and so on, especially in Europe, and HCL, with its integrated player status, appears well-placed to translate a part of it into business.

Two, this implies a lowered dependence on the BFSI vertical, which could experience turbulence due to the sub-prime crisis, with possibly lower or delayed IT spends. The company is also adopting, albeit at a lower scale, next-generation services with high revenue-earning potential, such as services-oriented Architecture, Web 2.0 and Master Data Management.

Operational metrics: HCL has seen increasing business from New Zealand and Australia as well as the Asia-Pacific region (combined 15.3 per cent of revenues). This, along with the fact that the European clientele has become an important contributor to its revenues (30.5 per cent), could not only give the company a geographical spread but also act as a possible mitigating factor against rupee appreciation.

In terms of client profile, HCL now has two clients who contribute over $100 million each, and all the multi-million dollar client categories have seen strong additions over the past year, pointing to good revenue prospects. The repeat business, at 94 per cent, indicates good service execution. This also helps reduce SG&A (Sales General & Administrative expenses) costs by reducing the need to spend on acquiring new clients.

Risks: Any appreciation of the rupee is a potential realisation risk. But the company has been one of the early adopters of a hedging strategy and has hedged $1.16 billion (about 85 per cent of its revenues, a high proportion among th e Tier I companies), which should partly help mitigate this risk.

Any cut in IT spend by the US clientele or a general slowdown in IT spends in financial services, which still account for 28 per cent of revenues, are risks to earnings. In its strategic move towards winning mega deals in the $50-100 million category, the company is likely to face stiff competition from national as well as international players, with a possible strain on margins. Attrition at 17.2 per cent, which is on the higher side, is a key execution risk. Wage inflation could also put pressure on margins.

HCL Technologies Ltd

HCL Technologies Ltd

HCL Technologies, Bharat Bijlee

HCL Technologies
Cluster: Apple Green
Recommendation: Buy
Price target: Rs395
Current market price: Rs300

Beaming with confidence

Result highlights

• HCL Technologies has reported a revenue growth of 2.2% quarter on quarter (qoq) and 28.6% year on year (yoy) to Rs1,612 crore for the fourth quarter ended March 2007. For the fourth consecutive quarter, it has reported close to double-digit sequential growth in revenues in dollar terms (up 9.2%). The sequential growth was driven by a 6.6% growth in volumes, a 1.7% improvement in the blended realisation and a one-time income (0.9%). However, the appreciation in the rupee by close to 7% limited the growth in revenues in rupee terms.
• The earnings before interest, tax, depreciation and amortisation (EBITDA) margin declined by 170 basis points to 21.6% on a sequential basis, due to the adverse impact of the steep appreciation in the rupee (a negative impact of 300 basis points) and higher selling, general and administration expenses (up by 60 basis points as a percentage of the sales) and unfavourable revenue mix (a negative impact of 30 basis points). This was partially mitigated by better realisation and an improvement in the utilisation rate. Consequently, the operating profit declined by 5.3% to Rs347.4 crore.
• However, the five-fold jump in foreign exchange (forex) fluctuation gains to Rs250.4 crore (up from Rs41.8 crore in Q3FY2007) and 87.3% growth in the other income component to Rs36.9 crore enabled the company to post a robust growth of 46.7% qoq and 108.9% yoy in its consolidated earnings to Rs486.7 crore. The company had taken an aggressive forex cover of $900 million at the beginning of the quarter, which was further increased to $1.16 billion as on June 30, 2007.
• In terms of operational highlights, the company signed seven large deals (multi-million, multi-year) during the quarter. The deals are spread across geographies and industry verticals, reasserting the company’s positioning as a strong contender for total outsourcing deals. Encouraged by the continued flow of large deals and the consequent growth momentum across the service lines, the management has given a broad guidance of a 30% growth in revenues (in dollar terms) for the next two years.
• To factor in the appreciation in the rupee and the charges related to the employee stock option scheme ($24 million in FY2008 which was not factored in earlier), we have revised downward our earnings estimate for FY2008 by 11% to Rs18.4 per share. However, the earnings estimate for FY2009 remains unchanged at Rs23.8 per share. We maintain our Buy recommendation on the stock with a price target of Rs395.

Bharat Bijlee
Cluster: Apple Green
Recommendation: Buy
Price target: Rs2,425
Current market price: Rs2,145

Beating all expectations with 62% growth

Result highlights

• Bharat Bijlee Ltd (BBL) has once again delivered a spectacular performance. Beating all market expectations its revenues grew by 62.8% to Rs115.6 crore in Q1FY2008.
• The operating profit moved up smartly by 161.5% to Rs19.9 crore, translating into an operating profit margin (OPM) of 17.2%. The OPM expanded by an impressive 650 basis points. The profit after tax (PAT) jumped by a whopping 194.4% to Rs12.6 crore, resulting in earnings per share of Rs22.5.
• The increase in the revenues and profits was due to improved realisation in both transformer and motor businesses. The margins expanded on the back of a lower cost-to-sales ratio. The raw material cost-to-sales ratio declined by 410 basis points to 65.2% during the quarter.
• The interest cost declined by 13.1% to Rs0.9 crore while the depreciation charge grew by 48.1% to Rs0.8 crore.
• At the end of the quarter the order backlog of BBL stood at Rs300 crore with the majority of the orders coming for transformers (about 65-70%).
• At the current market price of Rs2,145 the stock is discounting its FY2008E earning by 15.8x and FY2009E earnings by 11.7x. The stock is trading at 8.4x FY2008E enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) and 6.0x its FY2009E EV/EBIDTA.
  

Mindtree, Geodesic, HCL Technologies

Mindtree

MindTree Consulting (MindTree), a mid-sized IT and R&D services company, has strong management bandwidth. It services marquee clients like Volvo, AIG, LSI Logic, United Technologies, Symantec, Avis and Unilever. However, a high share of development services in revenues creates a project-based business profile, which lowers sales productivity, hurts utilization and leads to poor client mining. Thus, contrary to street expectations of an expansion, we see margins declining by 170bp over FY07-09 due to rupee appreciation and salary inflation. The management has cut its FY08 earnings guidance after Q1FY08 results, but we see further risk to consensus estimates for FY09. While the stock price has fallen 23% in just one month, further downside is likely at valuations of 19.8x FY09E earnings (19.2x for Infosys). Initiating coverage with Underperformer and a price target of Rs510.


Superior quality management: A strong management has successfully steered MindTree even through troubled times, which is a testimony to its ability. MindTree registered a robust 65% revenue CAGR over FY04-07 on the back of its positioning as the second best choice for clients offshoring IT and R&D services and looking for management attention. While R&D services are a good differentiator, we believe MindTree offers generic IT services with little differentiation.

Project-based nature of business and poor client mining haze visibility: Mindtree derived 65% of its FY07 revenues from development services, which tend to be volatile as they are project-based. Despite having a 71% share of offshore revenue compared to 35% for Hexaware (a comparable peer), MindTree fares poorly in terms of client mining with an average of just 15 billed people per client compared to 23 for Hexaware. Poor client mining lowers sales productivity, reduces visibility and affects utilization.

Valuation premium to tier-1 peers unjustified: Mindtree trades at premium valuations even to tier-1 companies, which we attribute to its superior management. However, we expect margins to decline by 170bp over FY07-09 due to the impact of rupee appreciation and salary inflation. We do not see too many operating levers playing out as most of the metrics are inherent to the business. At 19.8x FY09E earnings and 12.1x EV/EBITDA, we initiate coverage with Underperformer and a price target of Rs510.

HCL Technologies

HCLT’s Q4FY07 (June- year ending) results were marginally below our expectation, though, $ terms revenues were exactly in line. HCLT’s realized rate at Rs40.74/$ was below our assumed rate of Rs41.33/$. Hence revenues at $396m (9.2% qoq and 45.3% yoy) were in line but in Rupee terms revenues at Rs16.12b (2.2% qoq and 28.6% yoy) was lower than our forecast of Rs16.36b. HCLT reported 7 large deal wins in Q4FY07. With HCLT continuing to win large deals of over $50m (it has signed 3 large deals so far of $200-500m), we believe, sales productivity would keep rising. The company indicated a gross hiring target of 25,000 people including just 8,000 freshers, which points towards the imminent growth momentum in business. It also indicated that margins would remain stable as pricing moves away from a people-based model to a transaction oriented one. As the realized exchange rate was lower than our earlier forecast we are lowering our revenue forecast by 1.4% for FY08 and FY09. We are maintaining our earnings forecast for FY08 but raising FY09 earnings by 2.4%. We believe, HCLT has scaled up significantly and given its large deal market share, at 17.3x FY08 and 13.4x FY09 earnings, there is likely re-rating possible in FY08. It is one of our top picks in the sector. Maintain Outperformer.


Geodesic

Geodesic Information System (Geodesic) reported 18.2% qoq (+70.6% yoy) growth in revenues, the highest growth in last 6 quarters, to Rs579m against our expectation of Rs507m. The performance beat our forecast mainly because of advance received from a few enterprise customers including BenQ as initial fees for Mundu. EBITDA margins grew significantly from 64.8% in FY07 to 66.2% in Q1FY08 mainly due to the incremental fees booked from enterprise customers. Accordingly, PAT at Rs287m beat our estimate of Rs252m despite Rs36m loss on account of forex movement. Geodesic added five new clients including a large publishing house in Malaysia, a social networking site in Europe and an India based wireless service provider. Geodesic has managed to sign up with a few handset manufacturers including BenQ, Mitac and Asus and is in discussions with others, which would enable it to scale up its customer base. It is also planning to pursue initiatives to strike relationships with service providers both local as well international. Its other products including the Simputer, Spyder and Radio (could bundle along with the IM and offer to users for an annual fee rather than a one-time fee) would provide additional revenue streams. We are raising our revenue forecast by 14% and 19% and earnings forecast by only 2% (due to expected higher marketing expenses) and 24% for FY08 and FY09 respectively. At 19.4x FY08 and 11.9x FY09 earnings, we maintain out performer.

HCL Technologies Ltd

HCL Technologies Ltd

HCL Technologies

HCL Technologies

Sobha, HCL Tech, Metals, Cement

Sobha, HCL Tech, Metals, Cement

BRICS - L&T, BRICS - HCL Technologies

BRICS - HCL Technologies

BRICS - L&T

JP Morgan - HCL Technologies, UTI Bank, Economy

HCL Technologies

UTI Bank

Economy

Merrill Lynch - HCL Technologies, HSBC - HCL Technologies

Merrill Lynch - HCL Technologies

HSBC - HCL Technologies

Indiainfoline - TCS, HCL Tech, Infotech Enterprises, ACC, Petronet LNG, Tyre Industry

TCS

HCL Tech

Infotech Enterprises

ACC

Petronet LNG

Tyre Industry

Emkay - HCL Technologies

Emkay - HCL Technologies

Motilal Oswal - Results Reports - Apr 2007

Aventis

Banking

Dishman Pharma

Infosys Technologies

HCL Technologies

Tata Consultancy

UTI Bank

Kotak Reports - Apr 18

Kotak - Daily Morning Brief - 18 Apr 2007 - HCL (Buy)

Kotak - Market Mornking - 18 Apr 2007

ENAM - UTI Bank, HCL Tech, Tata Steel

ENAM Reports

UTI Bank

HCL Tech

Tata Steel

SSKI, Citigroup - HCL Technologies

SSKI - HCL Technologies

Citigroup - HCL Technologies

ASK RJ - TCS HCL

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Emkay Morning Notes

TCS

HCL Tech

Praj Industries

Ashok Leyland

Mahindra & Mahindra

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Sharekhan Investor's Eye dated January 15, 2007

PULSE TRACK

• November 2006 IIP zooms to 14.4%

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STOCK UPDATE

Marico
Cluster: Apple Green
Recommendation: Buy
Price target: Rs634
Current market price: Rs580

Intangible gains

Key points

• The board of directors of Marico has approved a proposal to split the stock in the ratio of 1:10.
• The board has also proposed financial restructuring to write off the intangibles against the reserves.
• The restructuring will lead to a leaner balance sheet and better return ratios.
• Due to the restructuring our earnings estimate would be higher by 17.1% for FY2008. We are not changing our earnings estimates and price target but will be revisiting the same after the Q3FY2007 results.
• The stock is trading at a price/earnings ratio of 24.1x FY2008E and enterprise value/earnings before interest, depreciation, tax and amortisation of 13.7x FY2008E. We continue to remain bullish on Marico and reiterate a Buy on the stock with a price target of Rs634.

Elder Pharmaceuticals
Cluster: Apple Green
Recommendation: Buy
Price target: Rs508
Current market price: Rs397

Price target revised to Rs508

Key points

• The revenues of Elder Pharmaceuticals (Elder) grew by 28.6% in H1FY2007 and by over 30% in Q2FY2007. We expect this 30% + growth trend to continue into H2FY2007 on the back of the sustained momentum in the company’s core brands, pick-up in the revenues from the in-licenced products and the growing contribution from the Fairone brand.
• Elder has been spending aggressively on advertising and promoting its existing products. With the increased penetration of its existing brands, rapid pace of new product launches and new in-licencing deals, we believe the growth momentum will continue in FY2008 as well.
• A lower raw material cost on account of backward integration into active pharmaceutical ingredients (APIs), an improving product mix, and substantial excise and tax savings arising out of the shift of manufacturing to the plants in the fiscal havens of Uttaranchal and Himachal are expected to improve the margins of the company. The increased selling and marketing expenses, on the other hand, are likely to put pressure on the margins. We expect Elder’s margins to expand by 180 basis points to 19% in FY2008E.
• To account for the above, we have revised our revenue and earnings estimates for Elder. We have revised Elder’s revenue estimates upward by 9.2% and 12.9% to Rs457.5 crore and Rs562.1 crore for FY2007 and FY2008 respectively. We have also upgraded Elder’s net profit estimate by 10.4% to Rs55.7 crore and Rs74.8 crore for FY2007 and FY2008 respectively.
• In view of its strong growth potential, we remain positive on Elder’s future growth prospects. At the current market price of Rs397, Elder is quoting at 9.9x our revised FY2008 earnings estimate. Based on our revised earnings, we are upgrading our price target for the stock to Rs508.

Aban Offshore
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs2,090
Current market price: Rs1,670

Results in line with expectations

Result highlights

• Aban Offshore Ltd (AOL) reported a 4.5% growth in its stand-alone revenues to Rs126.1 crore for the third quarter ended December 2006.
• The operating profit margin (OPM) declined by 310 basis points to 54.8% largely due to higher insurance charges (up 260 basis points) and an increase in the other expenses (up 660 basis points due to the amortisation of the expenses related to the foreign currency convertible bond issue done earlier). On the other hand, the savings in the staff cost and repairs as a percentage of sales limited the decline in the OPM.
• The net profit grew at a relatively higher rate of 13% to Rs20.8 crore in line with expectations. The growth in the bottom line was aided by an 87% jump in the other income to Rs5.6 crore. However, it should be noted that the company does not declare consolidated quarterly results and the stand-alone results do not reflect the robust growth in the earnings on a consolidated basis. We expect the performance to improve significantly in FY2008 and FY2009 due to the huge incremental gains from the additional assets and the scheduled re-pricing of its assets at relatively much higher day rates going forward.
• Along with the results, the company has announced the signing of a joint venture with the state government of Gujarat to offer offshore drilling services. The memorandum of understanding (MoU) has been signed between Gujarat State Petroleum Corporation (nominee of the Gujarat state government) and AOL’s subsidiary, Aban 8 Pte Ltd. The joint venture would function through a special purpose vehicle. The company is expected to spell out the specific details about the scope and scale of the operations of the new venture over the next couple of months.
• At the current market price the stock trades at 14x FY2008 and 6.8x FY2009 consolidated earning estimates. We maintain our Buy call on the stock with a price target of Rs2,090 (based on the derived value of its subsidiaries combined with the calculated value of its stand-alone earning estimates).

UTI Bank
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs580
Current market price: Rs535

Performance above expectations

Result highlights

• UTI Bank's Q3FY2007 profit after tax (PAT) reported a 40% year on year (yoy) growth to Rs184.6 crore which is 6.4% higher than our estimate of Rs173.5 crore, mainly due to a higher trading income reported during the quarter.
• The net interest income (NII) was up by 44.7% to Rs415.8 crore compared with our estimate of Rs407 crore. The reported net interest margin (NIM) expanded by six basis points yoy and by eight basis points quarter on quarter (qoq).
• The other income zoomed by 61.3% to Rs279.7 crore due mainly to a higher trading income while the core fee income growth remained robust at 58.9% yoy.
• The operating expenses continue to remain high due to a significant increase in the employee expenses and network expansion.
• The bank currently has a network of 481 branches with 2,126 automated teller machines (ATMs). This has helped the bank to grow its savings and current account deposits by 58.8% and 61.3% respectively compared with the overall deposit growth rate of 49.7% and improve its current and savings account (CASA) ratio to 37.1% from 34.7% yoy. However on a sequential basis, the CASA ratio has declined to 37.1% from 40% in Q2FY2007 mainly due to a 14.2% quarter on quarter (q-o-q) decline in the current account balance.
• The capital adequacy ratio (CAR) for the bank as on December 2006 stood at 11.8% with the tier-I capital at 6.96%. The bank has already raised Rs420 crore of hybrid tier-I capital and exhausted the headroom to raise more funds using the same route. Hence, considering the growth potential of the bank, we feel the bank needs to come out with a plain equity issue in FY2008. We have factored in an equity dilution of 3.6 crore shares (12.8% of pre-issue equity capital) at an issue price of Rs500 per share. This would help the bank to raise Rs1,800 crore and improve the tier-I ratio to above 8%. The book value (BV) per share would increase by almost Rs40 per share post-dilution from our previous pre-issue estimates.
• Based on the improved performance of the bank we have also increased our FY2007 and FY2008 PAT estimates by 7.3% to Rs645 crore and Rs829 crore respectively. Thus the revised FY2007 earnings per share (EPS) estimate stands at Rs23.2, up from Rs21.6. The equity dilution assumed by us has reduced the FY2008 EPS estimate rom Rs27.8 to Rs26.4. At the current market price of Rs535 the stock is quoting at 20.3x its FY2008E EPS, 10.3x its FY2008E pre-provisional profit (PPP) and 2.9x its FY2008E BV. We feel the dilution would be BV accretive and hence maintain our Buy recommendation on the stock with a revised price target of Rs580.

Nicholas Piramal India
Cluster: Apple Green
Recommendation: Buy
Price target: Rs393
Current market price: Rs262

Earnings upgraded

Key points

• Nicholas Piramal India Ltd (NPIL) and Eli Lilly and Co have signed a landmark new drug development agreement to develop and, in certain regions, commercialise a select group of Lilly's pre-clinical drug candidates that span multiple therapeutic areas. This agreement indicates the world-class research and development (R&D) capabilities of Nicholas Piramal.
• While NPIL's landmark deal with one of the leading innovative drug researchers like Eli Lilly has infused confidence among the investors the domestic formulations business has reported a more than expected growth. Alongside, the increased momentum in its CRAMS business and the successful integration and improvement in the capacity utilisation of the recently acquired facilities at Morpeth, UK (from Pfizer) enhances the earning visibility of the company. Hence, we are revising our estimates upward for FY2007 and FY2008.
• With the better than expected growth in the domestic formulation business, particularly in respiratory, anti-diabetics, gastrointestinal, dermatology, NSAIDs etc and the strong bounce back in the cough and cold brand--Phensedyl--we are revising the compounded annual growth rate (CAGR) of the formulation business from 12% to 14% during FY2006-08. On the other hand, the exports, largely supported by the successful integration and improvement in the capacity utilisation at Morpeth and the steady growth in the CRAMS business, would grow at a CAGR of 88% during FY2006-08. Hence, we are revising our revenue estimates to Rs2,347.8 crore and Rs2,770.1 crore for FY2007 and FY2008, respectively.
• On the margin front, we estimate a 480-basis-point expansion to 17.3% during FY2006-08, which would largely be driven by the increasing high-margin revenue flow from CRAMS, progressive shifting of manufacturing to excise-exempt facility at Baddi (Uttaranchal) and improved operating leverage at the Morpeth facility.
• With the improving revenues and margin coupled with the lower tax burden due to the commissioning of the manufacturing facility at Baddi,  we estimate the net earnings at Rs232.8 crore (87% growth) and Rs345 crore (48% growth) for FY2007 and FY2008, respectively. Our revised earnings estimates stand at Rs11.0 per share for FY2007 and Rs16.4 per share for FY2008. At the current market price of Rs262, NPIL is discounting its FY2008 estimated earnings by 16.0x.
• As per our revised estimates, we have valued NIPL's continuing business at Rs360 and have valued the drug development deal at Rs33 (ie 10x of the risk-adjusted EPS of Rs3.3). While valuing the drug development deal, we have just valued the potential milestone earning and ignored the potential royalties from the sale of the product by Eli Lilly in the USA, the EU & Japan and the revenue potential from the sale of the product by NPIL in other selected markets. Hence, we are fixing a revised target price of Rs393.

HCL Technologies
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs720
Current market price: Rs630

Firing on all cylinders

Result highlights

• HCL Technologies has reported a revenue growth of 6.2% quarter on quarter (qoq) and 39% year on year (yoy) to Rs1,465.1 crore for the second quarter ended December 2006, which is slightly below expectations. The sequential growth was largely driven by a 12.5% increase in the revenues of the infrastructure management service (IMS) business. On the other hand, the business process outsourcing (BPO) and software services businesses grew at a relatively lower rate of 5.4% and 5.2% respectively, on a sequential basis.
• The earnings before interest, tax, depreciation and amortisation (EBITDA) margins improved by 40 basis points to 22.1% on a sequential basis, despite the annual salary hikes given to 15% (senior and middle management level) of its work force with effect from October, the adverse impact of the steep appreciation in the rupee (3.6% appreciation in the average realised exchange rate against the US dollar) and the relatively higher selling, general and administration (SG&A) cost as a percentage of sales. The margin expansion was primarily driven by the higher employee utilisation (positive impact of 120 basis points) and better realisations (positive impact of 140 basis points).
• In terms of segments, the EBITDA margins of the software service and BPO businesses improved by 60 basis points and 40 basis points respectively. On the other hand, the IMS business reported a marginal decline in the margins to 17.5%, down 10 basis points sequentially.
• The earnings grew a a robust rate of 14.4% qoq and 57.8% yoy to Rs286.2 crore (ahead of our expectations of Rs258.8 crore and the consensus estimates of a flat growth sequentially). The growth in the earnings was also aided by the huge foreign exchange [forex] gains of Rs34.7 crore on the open forward contracts.
• In terms of operational highlights, the management indicated that the ramp-up in the large deals is beginning to make a material impact on the overall performance. The revenues from the six multi-million multi-year deals contributed to around 10% of the total turnover and is reflected in the third consecutive quarter of over 8% quarter-on-quarter (q-o-q) growth in the software services business in the dollar terms. What's more, the EBITDA margin on the revenues from the large deals is indicated to be higher than the average margins of the company.
• At the current market price the stock trades at 18.8x FY2007 and 15.2x FY2008 estimated earnings. We maintain our Buy recommendation on the stock with a price target of Rs720.

Tata Consultancy Services
Cluster: Evergreen
Recommendation: Buy
Price target: Under review
Current market price: Rs1,328

Q3FY2007—fist cut analysis

Result highlights

• Tata Consultancy Services (TCS) has reported a growth of 8.4% quarter on quarter (qoq) and of 40.8% year on year (yoy) in its consolidated revenues to Rs4,860.5 crore. The sequential revenue growth was largely driven by a 7.87% growth in volumes, a 2% improvement in the billing rates and productivity gains of 2.6% on the fixed price projects. On the other hand, the revenue growth was dented by 2.46% due to the appreciation of the rupee and by 1.56% from the shift towards offshore business.
• The earnings before interest and tax (EBIT) margins improved by 79 basis points to 26.1% on a sequential basis. The steep appreciation of the rupee dented the margins by 1.37% that was more than made up by the positive impact of 1.74% from the higher billing rates, 0.28% from the shift towards offshore business and 0.14% from the cost efficiencies. The company maintained its broad guidance of maintaining the full year margins close to 25.8% reported in FY2006.
• The other income stood at Rs30 crore (includes foreign exchange fluctuation gain of around Rs5 crore), up from Rs7.7 crore in Q2FY2007. Consequently, the earnings grew at a relatively higher rate of 11.4% qoq and 47.2% yoy to Rs1,104.7 crore.
• In terms of operational highlights, the company added 5,562 employees and 5 new clients during the quarter. It also bagged five large deals; two deals of over $100 million and three deals of over $50 million.
• Given the higher-than-expected performance, we would be revising upward the earnings estimates and the price target in the detailed result update. We maintain the Buy call on the stock.

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Motilal Oswal - HCL Tech

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