Visit http://indiaer.blogspot.com/ for complete details Broad-based growth momentum continues: For 1QFY2011, HCL Technologies
(HCL Tech) reported higher-than-expected revenue at US $803.8mn (v/s our
estimate of US$ 792.5mn), up 9% qoq. Growth was backed by volume growth of
7.4% in IT services and cross-currency benefit of 1.6%. Growth again proved to
be broad-based, spanning across verticals, geographies and service lines with the
BPO segment growing 5.7% qoq after posting de-growth since 4QFY2009.
EBIT margins slip: During the quarter, EBIT margins slipped by 242bp qoq on the
back of a) annual wage inflation in July 2010, b) weak utilisations with increased
hiring of freshers as well as laterals to create capacity for foreseen demand and
c) higher SG&A to encash on the strong deal flow.
Outlook and valuation: Management has indicated that the deal pipeline being
witnessed for October–December 2010 is the best ever seen, with typical deal
sizes of US $100mn–500mn and one as high as US $800mn. We expect the
company to be the outperformer at the volume front, with a 27% CAGR over
FY2010–12, higher than other Tier-I companies, on the back of its higher value
services portfolio. At the operating front, levers such as normalising employee
pyramid, lowering SG&A, expanding utilisations and turning around the BPO
segment will help improve margins. Hence, we expect EBITDA to grow at a 17%
CAGR over FY2010–12. PAT, on the other hand, is expected to post much higher
growth at a 34% CAGR, with nil forex losses and higher other income. We value
HCL Tech at 14.5x FY2012 EPS of `31.9, which is at 35% discount to Infosys’
target multiple of 22x. We revise our rating on the stock to Accumulate (earlier
Neutral) with a Target Price of `462.
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