Visit http://indiaer.blogspot.com/ for complete details HCL TECH 1QFY11: Revenues above estimate; PAT in-line; Lower margins on increased SGA costs; Cutting FY11 estimates
HCL Tech (HCLT IN, CMP Rs426, MCap US$6.5b, Buy) 1QFY11 US$ revenue growth of 9% QoQ is above our estimate of 4.2%, with growth across geographies, verticals and horizontals. PAT (after ESOP charge) at Rs3b is in line due to higher SGA costs (15.4% v/s est. of 14%). Key highlights:
1. Revenue at US$803.8m are up 9% QoQ (v/s est. of 4.2%), with Software Services growing 9.3% QoQ, Infrastructure services growing 8.9% and BPO turning the corner with 5.7% QoQ US$ revenue growth
2. Broad based demand traction as the company registered positive QoQ growth in every geography, vertical and horizontal for the first time in 10 quarters. Key growth drivers were: Customs Application - 15% QoQ, Infrastructure Services – 8.9% QoQ, Retail & CPG – 13%, BFSI – 10% QoQ; Europe grew 18.2% QoQ and APAC grew 19.8%
3. EBITDA margin fell 230bp QoQ to 15.6% v/s our est. of 15.8% due to increased SGA cost of 15.4% v/s our est. of 14%. The company guided for EBITDA margin recovery to 18% by 4QFY11 – lower than our estimate of 18.2% for FY11. Lower EBITDA margins are driven by wage hikes in 1QFY11, increased lateral hiring, higher SGA and continued operating losses in BPO.
4. Cash flow from operations at US$9.9m despite net income at US$71.8m is driven by increased other current assets (due to front-loaded investments in turnkey SI project for smart meters); guidance of Cash flow from Operations to remain at 100% of Net Income on a rolling 4-quarter basis.
- We have revised our FY11 EPS estimates downwards by 3.2% (Rs24.5) on higher SGA, despite increasing our FY11 US$ revenue growth guidance to 30.6% from 22.8% earlier on strong broad based growth. Our FY12 EPS estimate remains largely unchanged at Rs29.4
- We remain positive on HCL Tech on pr.paradigmshift@gmail.com Continued traction in discretionary segments like Engg. services (ERS)/Enterprise application services (EAS) (40% of revenue) and high growth segment of IMS (22% of revenue) c172a50186a0284d25bbfa5e81f8aa
- The stock trades at 17.4x FY11 and 14.5x FY12. Maintain Buy.
Topline growth above expectation; High SGA costs and forex losses weigh on Net Income
- HCL Tech’s 1QFY11 US$ revenues grew 9% QoQ to US$803.8m (vs est of 4.2% QoQ growth), driven by volume growth of 7.9% (v/s est. of 6.9%)
- BPO business grew 5.7% QoQ in US$ terms, while the remaining business grew 9.2% QoQ
- INR revenues at Rs36.1b grew by 5.4% QoQ (v/s est. of 2.1% growth to Rs35b)
- EBITDA margin (after ESOP charge) at 15.6% was down by 230bp QoQ (v/s est. of 210bp decline). Absolute EBITDA declined 8.2% QoQ to Rs5.6b (v/s est. of Rs5.5b)
- SGA as % of sales increased from 14.5% to 15.4% (v/s our est. of 14%)
- Forex loss at Rs638m (v/s est. of a loss of Rs686m)
- Effective tax rate at 20.5% (v/s est. of 20%)
- Profit after tax (excl. ESOP charge) at Rs3b, up 6.8% QoQ (in-line with our est.)
230bp decline in margin on increased SGA costs; SGA to remain higher; Guidance on margins a key negative
- HCL Tech EBITDA margins fell 230bp QoQ to 15.6% (v/s est. of 210bp decline); led by increased SGA costs (15.4% of sales v/s est. of 14%). EBIT declined 240bp QoQ: +52bp Currency movements and -292bp on wage hikes and increased SGA costs
- The company expects further increase in SGA (to ~16% levels) in 2QFY11 in order to capitalize on the demand opportunity visible in the current pipeline.
- While BPO revenues grew 5.7% QoQ, the segment is expected to continue to report operational losses of US$6-7m for another 5 quarters.
- As a result, HCL Tech guided for a recovery of EBITDA margins to 18% levels only in 4QFY11 v/s our earlier est. of 18.2% EBITDA margin for FY11.
- Utilization, increased offshoring, employee pyramid and scale down in SGA are the key margin levers, going forward
Other result highlights
- Outstanding hedges at US$300m
- Utilization including trainees at 70.1% was down by 280bp QoQ. (v/s est. of 74% up 110bp)
- Segmental EBIT margins (US$ terms) have declined by 320bp to 14.8% in Software services, declined 70bp to 14.3% in IMS, BPO EBIT margins at -14.8%.
- Growth drivers for 1QFY11 include Customs Application - 15% QoQ, Infrastructure Services – 8.9% QoQ, Retail & CPG – 13%, BFSI – 10% QoQ; Europe grew 18.2% QoQ and APAC grew 19.8%
- Quarterly dividend increased 50% to Rs1.5/share
- Attrition in software services at 16.7% (v/s 15.7% in 4QFY10)
- Growth by industry: BFSI: +10% QoQ (v/s +8% QoQ at Infosys); Hi-Tech Manufacturing: +8.7% QoQ (v/s +6.8% QoQ at Infosys); Retail:+13 QoQ (v/s +20.5% QoQ at Infosys)
- Growth by services: Custom application: +15% QoQ (v/s +5.6% at Infosys); Infrastructure Management: +8.9% QoQ (v/s -1% at Infosys); BPO: 5.7% QoQ (v/s +8.2% at Infosys)
- Growth by regions: US: +2.8% QoQ (v/s +7.5% QoQ at Infosys) and Asia Pac: +19.8% QoQ (v/s +6.8% at Infosys)
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