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HCL Technologies announced that it has signed a multiyear contract with Merck & Co (MRK). In this total outsourcing deal, HCL will provide a multitude of services like software-led IT solutions, remote infrastructure management, engineering & business and knowledge process services. The total contract value (TCV) is $500 million and the tenure is five years. HCL expects to hire more onsite staff in the US to support this project in the initial phase. HCL will service out of 20 locations, including the US, Poland, China and Brazil.Analysis: HCL has been in partnership with Merck since 2004, although this is the first time it has received a large total outsourcing contract from it. In 2007, both HCL and Cognizant (CTSH) signed deals with Merck but CTSH's contract was multi-year, multi-million dollar to provide a full suite of services, including applications outsourcing, infrastructure management and BPO services, similar to HCL's current deal win.The $500 m TCV for five years implies about 3.8% of FY10E (estimated) dollar revenues (at $100 m each year).The life sciences vertical contributes to about 7% of HCL's FY10E revenues. This compares with CTSH at 26.5%, TCS at 6% and Wipro at 8% (as of FY10). With this deal, HCL will strengthen its base in the life sciences vertical and could also make it a stronger contender for future bids. The deal reaffirms our thesis on HCL having the capability to successfully bid for and win larger total outsourcing deals. We forecast a 19% constant currency revenue CAGR (compound annual growth rate) and 23% earnings per share CAGR over FY10E-FY12E.Implications: We reiterate our Buy rating on the stock and maintain our price target and estimates. HCL currently trades at 15.9X on FY11E EPS of Rs 24.98, which is in its historical trading range of 13X-17X since 2003. The stock trades at 11%/23% discounts to its domestic peers on FY11E P/E and enterprise value/Ebitda multiples, respectively.—Goldman Sachs
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