Morgan Stanley has recommended equal weight rating on HCL Technologies. Given the 13% relative underperformance in the past three months and its June 2008 P/E multiple of around 17x valuations do not look demanding.

Quick Comment:

HCLT’s F4Q07 operational numbers were broadly in line with expectations and the company continues to sustain its revenue momentum of the past few quarters. Net income numbers were well above expectations due to significant forex gains.

What’s New:

Revenue rose 9% sequentially (USD) and growth continued to be strong. Software services revenue rose 8% QoQ. EBIT margins, excluding stock charges, dropped 180 bps QoQ and software margins declined 210 bps. While revenue was slightly higher than our estimates, margins were slightly lower. Net income was boosted by USD 62 million forex gains vs USD 9.6 million in the previous quarter. The company uses significant currency hedges to offset rupee appreciation (it had USD 1.16 billion of outstanding covers as at end-June). Operational parameters such as customer additions continue to look good.

Implications:

HCL Tech’s fundamentals have been strong for the past few quarters. Given the 13% relative underperformance in the past three months and its June 2008 P/E multiple of around 17x (on our current estimates), valuations do not look demanding. On a relative basis however, our preference is with Satyam (Overweight) given the larger size of its software services business and its equally strong business momentum – while Satyam has outperformed HCLT by 7% in the past three months, the valuation gap is not too wide currently.