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HCL Technologies (HCLT.BO, Buy, Rs423.35)
Pipeline for 2011 looks larger than 2010 – There are a lot of decision making
happening on churning in the non-discretionary spending side. Growth drivers:
(1) sharp focus on the churn (e.g., share shift) and (2) expanding the addressable
markets from emerging verticals and regions.
Infra management to continue to drive growth – Customers are churning out from
traditional incumbents and moving to new players like HCL. Recently, churn has picked
to 27%-30% (vs. 15-18% traditionally).Their last 4-5 deals are from renewal markets
with significant churn to their benefit.
Margin decline due to business model change – Shift from pure operations to a full
stack model diluted gross margins a bit. Investment in SG&A to trigger churns from
incumbent also impacted margins. However, investments have been made and
margins should improve going forward.
Supply side dynamics to ease out – Wage increase are inline with the industry and
this year’s wage increases has been already addressed for both, June and October
cycles. Management does not see any challenge in recruiting or being squeezed on
paying wage premium in order to recruit talent vs. the larger Indian IT players.
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