Analysts believe long-term deals to provide revenue visibility till 2014.
By now, it’s a known fact that a weak rupee is expected to shore up margins of technology companies. Despite this near-term upside, brokerages like CLSA believe that risks of demand moderation continue. It is in this competitive environment that several deals are expected to come up for renewal. Analysts believe HCL Technologies is well placed to cash in on this trend, not only because of its aggressive pricing but also its strong service offerings. Over the last few weeks, several brokerages have upgraded the stock.
Analysts say the company has revenue visibility till 2014, thanks to large multi-year deals signed since 2008. According to Avendus Securities, “The large multi–year deals worth $6.5 billion signed between FY08 and FY11 are likely to provide HCL Technologies a steady revenue run-rate over the next three years. The company derives 25 per cent of its revenues from infrastructure management services (IMS), which is the fastest growing service line. Given the low penetration of global sourcing of IMS (at just 2.4 per cent) and HCL Tech’s leadership position in this service line, we believe the company is well–poised to benefit from the estimated growth potential in IMS.” The company is also a leader in product engineering and enterprise application services, which contribute another 20 per cent to the revenues.
In the September quarter, the company has signed 12 large deals. Analysts believe that these long-term deals will provide revenue visibility till at least 2014. While some of its biggest service lines can be classified as discretionary spends, analysts believe that these revenue streams could be in risk in case of spending cuts. However, analysts say that with the market showing a preference for transformational work, HCL Tech is possibly best placed to capitalise on the big deals. Avendus is forecasting revenue compound annual growth rate (CAGR) of 19 per cent in IT services over FY12–FY14 in rupee terms, driven by a CAGR of 18 per cent in US dollar terms and a modest increase in realisation. We estimate revenues from IMS to grow at a CAGR of 22 per cent over FY12–FY14.”
That may be long-term trigger for an upgrade, but the company will be one of biggest beneficiary of the currency fluctuation, claim analysts. ICICI Direct expects the company to clock revenue growth of 2.8 per cent sequentially in dollar terms, mainly driven by core software (4.5 per cent quarter-on-quarter growth). The rupee revenue growth is expected to be around 12.8 per cent due to favourable currency movements. Profit margins are expected to be around 10.2 per cent, compared to 10.6 per cent in the first quarter, hedging losses of $15-$16 million. CLSA expects 80 basis points quarter-on-quarter improvement in margins with $10 million of forex loss.
