Result Impact: HCL Technologies hits record high; time to exit?

The stock was up over 3% at Rs 1,378 on the Bombay Stock Exchange.

HCL Technologies surged by over three% at Rs 1,378 in intra-day deals, also its record high on BSE, after reporting a better-than-expected 5.7% quarter-on-quarter (q-o-q) growth in its consolidated net profit at Rs 1,496 crore for the second quarter ended December 2013 (Q2).

Revenues on a consolidated basis grew 2.8% at Rs 8,184 crore sequentially.

Analysts on an average had expected revenues of Rs 8,143 crore and profit of Rs 1,419 crore from the country’s fourth largest IT services firm. The company in a statement said that return of equity reached an all time high of 35%. It also announced a dividend of Rs 4 per share.

“The results were higher than expectations, both, on the revenues and margins. Revenues growth of 3% in constant currency terms was a positive surprise in a seasonally weak quarter. Margins fell slightly despite salary hikes, due to G&A (General and Administrative) spend rationalisation and improved efficiencies. Utilisation levels excluding trainees have remained at about 84% in Q2 and it may be difficult to increase the same further,” said Dipen Shah, Head of Private Client Group Research, Kotak Securities.

“The company needs to improve growth rates in non-IMS businesses to make the overall growth more robust and sustainable. It also needs to implement more levers to sustain and improve margins in the backdrop of high utilisation levels and a benign currency,” he adds.

The stock opened at Rs 1,350 and touched a low of Rs 1,342 on the BSE (Bombay Stock Exchange). A combined around 800,000 shares changed hands on the counter in early morning deals on both the exchanges.

Stock strategy

Given the strong set of numbers and the road ahead for the information technology (IT) sector, analysts suggest that investors can hold on to the stock for now.

“HCL Technologies has a strong position in one of the fastest growing service vertical of IMS (infrastructure management services) and on the back of this the company has been growing largely at par with its peers. The concern of weak growth in core software services have been shrugged off by the company in the current set of results and management indicated that the deal pipeline in this area of services continues to remains healthy,” said Ankita Somani, research analyst – IT with Angel Broking.

“Overall, the company performed exceptionally well on the margins front and we continue to remain positive on the stock for a longer-term perspective keeping in notice the company’s deal signing trajectory and healthy operating performance since last several quarters. We maintain our Accumulate rating on the stock,” she adds.

Rumit Dugar and Udit Garg of Religare Institutional Research have raised their FY14/FY15 EPS (earnings per share) to Rs 86/Rs 94 to factor in the healthy margin performance and roll over to a new March 2015 target price of Rs 1,600 (from Rs 1,200) based on 15x fwd P/E.

They believe that growth in Q2 has been a bit more broad-based compared to previous quarters, though further acceleration is needed in software services for a continued re-rating.