Visit http://indiaer.blogspot.com/ for complete details Margins likely bottoming; Revenue traction should continue
1QFY11 EBIT muted as expected, down 7% qoq but 4% ahead of our est. on 2%
rev beat. PAT down 2% qoq, 10% ahead of our est, helped by other income/lowerforex losses. As flagged in our preview, reiteration of FY11 margin decline
guidance of 250bps, led to stock sell off. Our FY11 EPSe was 7% below preresult
consensus and we expect cuts to consensus. However, believe margins will
likely bottom next qrt & favorable rev mix, improved competitive position and
reducing interest cost/forex losses should help drive our largely unchanged
earnings growth forecast of 32% CAGR over FY10-13. Retain our PO of Rs500,
at 17xFY12e PE, at 20% discount to Wipro’s target EV/E to Ebitda growth, given
lower margins, aggressive investments’ trajectory and hence lower visibility.
Margin fall in-line; Future investment plan to be watched
1Q EBIT margin fell sharply by ~240bps qoq/515bps yoy, as guided, on annual
wage hike, hiring led steep fall in utilization, BPO investments and transition
related investments in the fast growing infrastructure management services
space. While 2Q margins could decline another 50-100bps mainly on Rupee
appreciation, subsequently continued rev ramp, utilization uptick, employee
pyramid broadening & turnaround in BPO should lead to margin uptick. Medium
term plan of investing US$50m in incubating new offerings to be watched.
All round rev growth; Strong client/employee addition
HCLT reported strong USD terms rev growth of 9% qoq/28% yoy, which follows 6-
7 quarters of industry leading rev growth. HCLT saw all-round rev growth, with
BPO’s return to growth being notable and custom application development and
Europe/emerging markets, retail/CPG, healthcare, financial services and telecom
reporting double-digit sequential growth. US & engineering svcs took a breather.
Strong net client addition & 2nd consecutive quarter of strong employee addition.
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