HCL Technologies : Recommendation Review

In this issue, we have reviewed HCL Technologies. We suggest that investors book partial profits in this counter.

HCL Technologies

Book Partial Profits

The sector that benefits the most from rupee depreciation is IT. This industry is dependent on exports for about 90 per cent of its revenues, thus being directly and largely benefited by a slide in the currency. We had recommended HCL Technologies in DSIJ Vol. 27, Issue # 12 (dated June 3, 2012) based on this premise as well as the fact that it is a company with a robust performance.

When we recommended the scrip, the rupee was trading at 54.681 to the dollar after which it reached a high of 57.2165 to the dollar, benefiting IT players across the board. However, the industry faced a number of hurdles that offset the benefits of this currency depreciation. These factors included global macroeconomic trends, reduced IT spending, delayed decision making and changing technological trends.

However, HCLT managed to brave all of these and still emerge as an outperformer. In the last three quarters, the average sequential growth rate of the company has been around 8.75 per cent. It has also seen a tremendous improvement in margins during this period. Compared to Q3FY12, the company’s EBIT margin and net profit margin improved by 1069 basis points and 771 basis points respectively in Q3FY13. HCLT is one of the most profitable IT companies in India, with an operating margin of 34.78 per cent.

This outperformance of HCLT has been reflected in its share prices too. We had recommended this stock at a price of Rs 484 per share. Since then, it has risen by 60.12 per cent, and is at a tremendous premium to the benchmark index and most other IT companies. We thus recommend that investors book at least partial profits in this scrip at these levels.