HCL Technologies by linzhengnd


									                                                                          HCL Technologies
                                                                          The newest suitor for the bride

September 29, 2008                                                            Gunning for Axon: HCL Technologies (HCLT) on Friday entered the fray

                                                                                                                                                                 Evemt Update
                                                                              to acquire Axon, by submitting a counter offer of 650p per share to
                                                                              Infosys’ 600p per share. This values Axon at GBP441mn and is a premium
Rating                                                 Accumulate
                                                                              of 8.3% to Infosys’ offer. We expect Infosys to improve its 600p offer to
Price                                                            Rs213
                                                                              either match or exceed HCLT.
Target Price                                                     Rs258
                                                                              HCLT’s acquisition argument: HCLTs ambition to emerge as a top 5
Implied Upside                                                   21.0%
                                                                              global SAP vendor and its need to grow its EAS services makes Axon, a
Sensex                                                           13,102
                                                                              focused SAP player, an attractive acquisition candidate. Further,
(Prices as on September 26, 2008)
                                                                              complementarity between the client profiles and geo-spread enhances
                                                                              the appeal of Axon for HCLT which motivates us to posit that, should the
                                                                              need arise, HCLT will up the stakes to win Axon.
Trading Data
Market Cap. (Rs bn)                                               143.9       Financial impact: At current bid price of 650pence, impact of deal on
Shares o/s (m)                                                    675.9       HCLTs FY’10 EPS ought to be accretive by 1.5% (v/s our earlier Ex-Axon
Free Float                                                       32.5%        estimates).Our scenario analysis also indicates that even at a bid price of
3M Avg. Daily Vol (‘000)                                          148.2       700 pence, the deal will not be EPS dilutive for HCLT .We believe that
3M Avg. Daily Value (Rs m)                                         33.2
                                                                              liberal use of leverage to finance the acquisition is the prime reason for
                                                                              blunted negative impact on earnings with cost of debt trailing treasury

                                                                              Impact on stocks: It is likely that the battle for Axon will be a
Major Shareholders                                                            protracted one, possibly going on for the next few months. Clearly, while
Promoters                                                        67.5%        Axon is a great strategic fit for both Infosys and HCLT, uncertainty over
Foreign                                                          17.7%        the outcome of the bidding battle will put some pressure on the stocks in
Domestic Inst.                                                    6.2%        the near-term. We have an ‘Accumulate’ rating on both the stocks from
Public & Others                                                   8.6%        a 12-month perspective.

                                                                          Key financials (Y/e June)           FY07    FY08           FY09E              FY10E
                                                                          Revenues (Rs m)                 60,336     76,394          96,686            113,380
                                                                             Growth (%)                     37.5        26.6           26.6               17.3
Stock Performance
                                                                          EBITDA (Rs m)                   13,370     16,939          20,978             23,784
(%)                               1M            6M                 12M    PAT (Rs m)                      13,660     11,283          15,056             17,525
Absolute                     (8.8)           (21.7)              (29.0)   EPS (Rs)                          18.5        16.6           22.1               25.8
                                                                             Growth (%)                     72.9      (10.3)           33.5               16.4
Relative                          1.2         (1.7)               (4.7)
                                                                          Net DPS (Rs)                       8.0         8.0            8.5               10.0

                                                                          Source: Company Data; PL Research

Price Performance (RIC: HCLT.BO, BB: HCLT IN)                             Profitability & valuation           FY07    FY08           FY09E              FY10E
  (Rs)                                                                    EBITDA margin (%)                   22.2     22.2            21.7               21.0
 350                                                                      RoE (%)                             30.1     21.1            25.4               26.6
 330                                                                      RoCE (%)                            29.4     20.6            24.6               25.6
 310                                                                      EV / sales (x)                       2.0      1.6             1.3                1.0
 290                                                                      EV / EBITDA (x)                      9.2      7.2             5.8                4.8
                                                                          PE (x)                              11.5     12.8             9.6                8.3
                                                                          P / BV (x)                           2.9      2.5             2.3                2.1
 210                                                                      Net dividend yield (%)               3.8      3.8             4.0                4.7
 190                                                                      Source: Company Data; PL Research




                                                                          Jayendran Rajappa                              Jaspreet Chhabra
                                                                          JayendranRajappa@PLIndia.com                   JaspreetChhabra@PLIndia.com
Source: Bloomberg                                                         +91-22-6632 2243                               +91-22-6632 2256
                                                                                 HCL Technologies

                     Competing bid for Axon

                     HCL Technologies (HCLT) put in a competing all-cash bid for Axon yesterday.
                     It has offered 650p per share of Axon compared to 600p offered by Infosys,
                     valuing Axon at GBP441mn (i.e. about USD813mn). The company states that
                     it was been exploring the option of acquiring Axon since January 2008 and
                     started active discussion with the management in July 2008. It intends to
                     finance the deal using about GBP400mn debt and GBP41mn internal cash
                     reserves. As of June 2008, HCLT had cash reserves of $570m on its books.
                     The GBP400mn financing has been tied up with consortium led by Standard
                     Chartered Bank.

                     Infosys may respond with a matching/higher bid

                     In our opinion it is quite likely that Infosys will respond with a matching or
                     higher bid for Axon. From Infosys’ point of view not bidding is the worst of
                     the three options – do nothing, match or bid higher. The essential question
                     for Infosys to make up its mind is about matching the offer (and hence risk
                     inviting an even higher offer from HCLT) or bidding higher (and risk leaving
                     little headroom in the event of an extended battle).

                     HCLT rationale

                     HCLT claims that Enterprise Application Services (EAS) was identified as a
                     core service with potential to drive growth in early 2005. However, growth
                     of EAS within HCLT has not been substantial. The company expect the Axon
                     acquisition to plug this lacunae. Significantly, HCLTs stated intention of
                     emerging as a global top five SAP vendor will get a major boost should the
                     Axon acquisition go through. Management commentary also highlights
                     complementarity between the client profile and geographical spread of Axon
                     and HCLT thereby leading to minimal overlaps leading to strengthening
                     overall business portfolio for the merged entity. Axons limited exposure to
                     BFSI and its focus on Government business makes it appealing given the
                     current macro environment. Finally, management stresses upon similarity
                     between the two corporate cultures, which if taken at face value ought to
                     ease merger pangs and smoothen the integration process going forward.

September 29, 2008                                                                               2
                                                                                    HCL Technologies

                     Financial impact

                     Our broad analysis indicates that at its current bid price of 650 pence per
                     share, HCLTs FY’10 earnings ought to be accretive by 1.5% (v/s our earlier
                     Ex-Axon estimates) at Rs 27.2 per share (a bid at 750pence will make the
                     deal EPS dilutive by 0.7%).It may be noted that funding a major part of the
                     acquisition via debt is a major reason for blunted impact on HCLTs earnings
                     (with cost of debt being lower than treasury yield).The table below
                     summarizes various scenario outcomes and the underlying assumptions
                     governing our approach. Interestingly, the table also indicates that in the
                     event of a bidding war, HCLT can afford to increase its bid to over 700p
                     without the deal becoming EPS dilutive. We believe this gives greater leeway
                     to HCLT and swings the odds of winning in its favor.

                     Impact on FY10E Earnings per Share
                                         Current EPS                      Possible consideration range
                                                                  650p          700p             750p
                                          (Ex. Axon)
                     Infosys                   110.9              110.6         110.2           109.8
                                                                  -0.2%         -0.6%           -1.0%
                     HCLT                        26.8              27.2          26.9            26.6
                                                                  1.5%           0.4%           -0.7%
                     HCLT: Treasury Yield 11.0%, Cost of Debt 7.5%, Cash reserve use capped at GBP41mn
                     Infosys: Treasury Yield 9.5%, No debt used
                     Axon: Growth assumed at 10% in FY09 and 20% in FY10 with no change in margins

                     Impact on stocks

                     We expect that the battle for Axon is likely to extend for sometime (at least
                     for the next couple of months and possibly going into Q4FY09). The
                     uncertainty on the final outcome of the process, coupled with macro
                     economic uncertainty in the US and the problems in the financial sector is
                     likely to keep both these stocks - HCLT as well as Infosys – subdued for the
                     time. We rate both these stocks ‘Accumulate’ from a 12-month perspective.

September 29, 2008                                                                                   3
                                                                                                                                                   HCL Technologies

Prabhudas Lilladher Pvt. Ltd.
3rd Floor, Sadhana House, 570, P. B. Marg, Worli, Mumbai-400 018, India.
Tel: (91 22) 6632 2222 Fax: (91 22) 6632 2209

 PL’s Recommendation Nomenclature

 BUY                 :   Over 15% Outperformance to Sensex over 12-months           Accumulate             :   Outperformance to Sensex over 12-months

 Reduce              :   Underperformance to Sensex over 12-months                  Sell                   :   Over 15% underperformance to Sensex over 12-months

 Trading Buy         :   Over 10% absolute upside in 1-month                        Trading Sell           :   Over 10% absolute decline in 1-month

 Not Rated (NR)      :   No specific call on the stock                              Under Review (UR) :        Rating likely to change shortly

This document has been prepared by the Research Division of Prabhudas Lilladher Pvt. Ltd. Mumbai, India (PL) and is meant for use by the recipient only as information
and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of PL. It should not be considered or taken
as an offer to sell or a solicitation to buy or sell any security.

The information contained in this report has been obtained from sources that are considered to be reliable. However, PL has not independently verified the accuracy or
completeness of the same. Neither PL nor any of its affiliates, its directors or its employees accept any responsibility of whatsoever nature for the information,
statements and opinion given, made available or expressed herein or for any omission therein.

Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The
suitability or otherwise of any investments will depend upon the recipient's particular circumstances and, in case of doubt, advice should be sought from an independent

Either PL or its affiliates or its directors or its employees or its representatives or its clients or their relatives may have position(s), make market, act as principal or
engage in transactions of securities of companies referred to in this report and they may have used the research material prior to publication.
We may from time to time solicit or perform investment banking or other services for any company mentioned in this document.

September 29, 2008                                                                                                                                                         4

To top