HCL Tech: retain our 2 (Outperform) rating post Sept 2010 qtr results; Daiwa

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HCL Technologies (HCLT IN) Rating:2
Double-digit sequential US-dollar revenue growth for three out of seven sectors



What has changed?
• HCL Technologies (HCLT) announced a 9% QoQ rise in its US-dollar revenue to
US$804m for 1Q FY11, 2.7% higher than our forecast. IT-services revenue (72%
of the company’s 1Q FY11 revenue) rose by 9.3% QoQ.
Impact
• Growth in HCLT’s US-dollar revenue remained strong sequentially, with an
increase exceeding 9% QoQ for the second successive quarter. Revenue from
infrastructure services (22% of 1Q FY11 revenue) was strong too, rising by 8.9%
QoQ. The sequential decline in business process outsourcing (BPO) revenue was
reversed from prior periods to an increase of 5.7% QoQ for 1Q FY11.
• The 9.3% YoY rise in US-dollar IT-services revenue was aided by an increase of
7.9% QoQ in volume, with prices up by 1.4% QoQ. Though the Rupee’s average
exchange rate versus the US dollar depreciated by 1.6% QoQ for 1Q FY11, HCLT
adopted the rate prevailing on the last day of the quarter for translation purposes.
• As a result, revenue in Rupees rose by just 5.4% QoQ to Rs36.1bn, slightly
lower than our forecast of Rs36.5bn. As indicated previously, the company
implemented a wage hike from January 2010, and as a result the EBITDA
margin contracted by 2.3 percentage points QoQ to 16.3% for 1Q FY11. We
expect this sequential contraction to be reversed from 2Q FY11.
• The other profit-and-loss items were in line with our expectations, but the net
profit was Rs360m lower than our forecast, as we had expected lower wage
increases than those that were implemented. We have revised up our revenue
forecasts for FY11, FY12 and FY13 by 3.4%, 3.5% and 3.6%, respectively, on
the back of improving demand and the reversal of the BPO revenue decline.
However, we have revised down our FY11 EPS forecast by 4.4%, as the wage
increases were much higher than those factored into our previous forecast.
Valuation

• We maintain our six-month target price of Rs490, based on a target PER of 14x on
our FY12 EPS forecast, and retain our 2 (Outperform) rating on HCLT.
Catalysts and action
• For 1Q FY11, three out of HCLT’s seven sectors recorded double-digit sequential
revenue growth, with revenue from Europe up by 14% QoQ. We believe the BPO
business would have to record a net profit for FY11 to prompt a re-rating of HCLT.