Visit http://indiaer.blogspot.com/ for complete details Key highlights
• Revenues in line, margins decline: HCL Tech reported revenues of US$804m, up 9.0% qoq and 27.6% yoy (our
estimate: US$794m). EBIT margin fell ~240bp qoq to 12.9% (our estimate: ~160bp decline) largely due to wage hikes.
Higher-than-expected tax (Rs0.8bn) with lower margins led to lower-than-expected net profit of Rs3bn (our estimate:
Rs3.4bn). All business segments grew qoq; IT/Infra services grew by ~9% while BPO services grew by ~6%.
• Strong hiring indicates confidence on business pipeline: The company saw gross hiring of ~11,800 and net hiring of
~5,600 (9% of the base a quarter ago) on the back of similar hiring in the previous quarter. The hiring is in
anticipation of deal ramp-ups as also pipeline conversion, which indicate the management’s confidence in the
business pipeline. HCLT absorbed across-the-board wage hikes and promotions this quarter.
• Margins likely bottomed out in Q1: HCLT lost ~700bp in EBIT margins over the past 8-10 quarters. We believe
margins have bottomed out and expect a 200-300bp improvement over the next 3-4 quarters. The companyindicated
margins will largely be maintained despite an SG&A step-up in Q2; it spoke of a recovery starting Q3 with several
levers across utilization, SG&A leverage, fresher hiring, etc. Margins remain a key monitorable for HCLT.
• Growth in constant currency terms in key segments: All geographies and verticals reported qoq growth. Europe
grew by ~13%, North America by ~3%, and RoW by 17%. Retail & CPG and Healthcare grew 10-11% while Media &
Entertainment grew just 1.3%. All other verticals reported 6-8% growth. Among services, ADM grew ~13%, Infra
services ~8%, EAS ~5%, Engineering/R&D ~3% and BPO services ~4%.
• Other highlights: Dividend of Rs1.50; hedges of US$197m; cash of US$537m; debt of US$577m; receivables of 80
days and an effective tax rate of ~20% till Mar’11 and 25% thereafter.
Valuations and View: High leverage to discretionary spend (EAS, R&D/Engg and AppDev) and focus on large deals
position HCLT well to deliver strong volume-led revenue growth (in line with Tier1 peers). The ~700bp margin decline
over the last 8-10 quarters is expected to partly reverse over the next 3-4 quarters. Healthy revenue growth, margin
improvement and forex losses swinging to gains would lead to stellar ~29% EPS CAGR over FY10-13E. Our lower-than-
Street FY11 earnings estimates and higher-than-Street FY12 estimates are largely unchanged. We have introduced FY13E
EPS estimates which are ~4% higher than Street numbers. We value HCL Tech at a 12-month price target at Rs500, based
on 16x FY12E EPS. Trading at 13.5x FY11E and ~11x FY12E EPS, we maintain Outperformer on the stock.
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