HCL Technologies reported its first quarter results for 2017 this morning and they look like this:

HCL Tech Q1 – 2017 Q4 – 2016 Q1 – 2016 % change Q-Q % change Y-Y
Revenues 11,336 10,698 9,777 5.96% 15.95%
EBIT 2,586 2,422 2,188 6.77% 18.19%
EBIT Margin 22.81% 22.64% 22.38 0.17 Bpt 0.43 Bpt
Net Profit 2,047 1,926 1,783 6.28% 14.81%

 

In the IT sector, so far we found only HCL Technologies first quarter results as one of the best report card. Revenues grew by 16% on Q-Q basis EBIT margins (including other income) stand at 22.81% and net profits grew by 15% on Q-Q basis.

The management had come out with guidance of revenues growing between 12% – 14% and EBIT margins (Excluding other income) in range of 19.50% – 20.5% for the 2017 financial year.

There are approximately 30 analysts who follow this business very closely on day to day basis and they expect HCL Tech to report its 2017 profits in range of Rs 7,450 – Rs 8,936 crore. If we factor in the guidance of the management for revenue growth of 12%, then we come to its expected profits for 2017 to be Rs 8,615 crore. So far it definitely looks that it will report its earnings close to higher band of analyst’s expectation.

If we punch in the analysts expected earnings in our intrinsic value calculations then its intrinsic value spectrum for 2017 comes in the range of Rs 596 – Rs 819 per share. Same way if we calculate its 2018 intrinsic value spectrum on analyst’s earnings expectation it comes in range of Rs 599 – Rs 861 per share. These values changes as new information comes up in the market, but not as fast as the stock price of the company.

As per our analysis HCL Tech is trading outside its 2017 intrinsic value band today and therefore is expensive. If I am looking at 2018 earnings figure and buying this stock then there is no enough safety of margin (look for at least 20%) available with this stock today.

Aziz Dodhiya is the chief investment officer for the Valueoperations funds which operates in the Indian market as an FPI (Foreign Portfolio Investor). We do not offer any personal advice to buy or sell any stocks and the views that are shared by Aziz might not incline to your personal investment strategy and this is the reason we advise you to take professional advice before going ahead with our views.