HCL Technologies In-line 1Q; Growth story on track: Macquarie Research,

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HCL Technologies
In-line 1Q; Growth story on track
Event
 We retain our OP recommendation on HCLT post in-line 1Q results (year-end
June). The company has delivered robust top-line growth in last two quarters
and we expect margins to pick up in due course. We have increased our
FY11 and FY12 revenue forecast and are raising our target price to Rs515.
Impact
 Raising revenue estimates on back of healthy deal pipeline. HCLT has
delivered two consecutive quarters of high growth (9% QoQ in 1Q and 8% in
4Q). On its earnings conference call management shared their optimistic view
on the deal pipeline for the 2H CY10. We have a positive view on the demand
outlook for Indian IT vendors and think HCLT‟s Infrastructure management
and Enterprise Application service offerings position them well for capturing
this growth. We estimate HCLT to deliver US$ revenue growth of 28% in
FY11 and 26% in FY12.
 Investment in growth would pressure margins. HCLT 1Q FY11 EBIT
margins of 12.9% missed our forecast by 100bp - completely due to higher
SG&A costs. We learnt from the management that increased investment in
sales was driven by 13% higher sales headcount. 52% of new sales hires are
focusing on emerging geographies. We expect higher employee costs and
increased SG&A outlay in future to capture the revenue growth. Hence, we
are reducing our margin forecast for the company by100-200bp for FY11-13.
 BPO reaches an inflection, profitability still an issue. After three quarters
of sequential decline, the BPO segment delivered 6% QoQ revenue growth.
Even so, it would take the company another five quarters to return the
segment to profitability at EBIT level.
 1Q results detail. HCLT reported revenues of Rs37.1bn (up 8% QoQ
and 22% YoY), EBITDA of Rs6.0bn (down 6% QoQ and down 12% YoY) and
PAT of Rs3.3bn (down 3% QoQ and up 3% YoY). EBITDA margins of 16.3%
for the quarter came in 90bp lower than our estimate of 17.2%. US$ revenues
came in at US$804m (up 9% QoQ).
Earnings and target price revision
 Increased revenue estimates lift our FY12 EPS by 11%. For FY11 reduced
margins negate the impact at EPS level. Our revised TP is Rs515 (vs. Rs435)
to factor in raised EPS estimates and rolling forward of our DCF to March „12.
Price catalyst

 12-month price target: Rs515.00 based on a DCF methodology.
 Catalyst: Deal wins in infrastructure management and uptick in EAS offering
Action and recommendation
 Reiterate OP. The stock is currently trading at one year forward PER of ~14x
vs. previous up-cycle multiples of 18-20x. Recommend investors to
accumulate the stock.