In a groove | Value Research HCL is pacing itself to compete with the industry bellwethers as it executes bigger deals with high margins
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In a groove

HCL is pacing itself to compete with the industry bellwethers as it executes bigger deals with high margins

HCL Tech is on a roll. Margins are up and growth rates are higher than industry heavyweight Infosys. And after successfully executing $200-300 million deals, HCL is now raring to go for bigger fish. It is now participating in the $400-500 million deals. The last quarter saw HCL win deals worth over $1 billion and a run rate of 3.2 per cent (q-o-q). Compare that with Infosys’ reported growth of only 1.4 per cent and it becomes clear why HCL is the new market favourite. Its stock has seen a whopping 75 per cent jump in the last one year compared to the sector’s modest 20 per cent gains during the same period.

How does the rupee depreciation help?

HCL has hedged $1.6 billion which is approximately 29 per cent of their FY14E dollar revenues. According to Motilal Oswal, the rupee depreciation is likely to spike HCL Tech’s FY14 earnings by as much as 10.4 per cent making it one of the biggest large-cap gainers in the tech universe.

Watch out for: Much of HCL’s traction could be pinned on the successful run of its Infrastructure Management Services (IMS). In the last quarter, Infra services gained a phenomenal 8.6 per cent (q-o-q) and 42 per cent (y-o-y) on the back of large deal wins. For HCL to continue its momentum, infra services needs to keep on winning large bids.

On the back of various cost-cutting measures, HCL has managed to improve its Ebitda margins to 20 per cent levels (March 2013 quarter) from FY11 margins of 17 per cent. According to the company, it still has some leeway to improve margins ahead.

Keep an eye out for growth in the Enterprise Application Software (EAS) which is usually a good indicator of discretionary spending. In the last quarter EAS was up 3.2 per cent (q-o-q). In what can be a sign of improving discretionary spending, this vertical reported that growth after two successive quarters of decline.

This report is a continuation of our previous story about companies that stand to gain from falling rupee. HCL is one of them.

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