Edelweiss Research has come out with pre earnings report on HCL Technologies. It has recommended buy rating on the stock.

Expected numbers

They expect HCL Technologies to report Q3FY07 revenues of INR 14.6 bn, a growth of 6.2% Q-o-Q and Y-o-Y growth of 39%. Net profit estimates stand at INR 2.6 bn (Q-o-Q growth of 12.9%).

Improving margins in IMS and BPO services

Edelweiss expects marginally better margins for IMS and BPO services. This is reflected in our expectations of better EBITDA margins of about 22% in Q3FY07, up 130bps from Q1FY07. Over time, we also expect recent deals in IMS and BPO to contribute higher share of profits to the overall business.

Software services margins to sustain

They expect margins in IT services to sustain, going forward. Currently, EBITDA margins for IT services are in the 22-23% range, which, along with growing large accounts, will have a steady-to-upward bias despite our assumption of steady billing rates. However, at the same time, we expect the additional margin to be reinvested in the business to fund future growth.

Improved client mining ability

HCL Technologies has, in the past year, won large deals which are at the initial start up stage. With its superior ability to mine clients, we believe these accounts will drive the growth momentum for the company going forward. We will look for continued evidence of this in the company’s commentary on quarterly results.

Below-the-operating line items may pull back bottomline

They expect HCL Technologies to report EBITDA of INR 3.5 bn (7.6% growth Q-o-Q), but reported net income is likely to be sequentially flat due to: (a) our assumptions that the company will bear a slightly higher charge towards non-cash stock-based compensation (including RSUs) in Q3FY07; and (b) higher tax outgo at effective rate of 7.5% versus 6.6% in Q2FY07.

Valuations

At CMP of INR 272, the stock currently trades at a P/E of 14.1x and 11.3x and EV/EBITDA of 10.3x and 8.5x for our FY08E and FY09E earnings, respectively. We retain our Buy recommendation.

Download Full Report HERE including Mid-cap IT Sector

Above is the briefs of the full report download link