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HCL Tech ----------------------------------------------------------------------- Maintain OUTPERFORM
Management indicates a strong focus on improving profitability
● HCL Tech delivered strong December 2010 results with
revenue/EBIT/net profit coming 1%/6%/8% above our estimates.
The growth was across verticals, geographies and services lines.
● Management indicated that it continued to see a very strong
demand environment with strong contract signings and positive
momentum on pricing.
● Management indicated that margin improvement could be the key
focus of the company over the next two quarters. The company
expects close to 200 bp margin improvement in the next two
quarters. We build in 130 bp improvement in margins by the June
2011 quarter.
● Given the strong environment, we believe HCL Tech could have
good revenue growth. Further, the company could have a more
leveraged model with: (1) margin improvement and (2) lower forex
losses. This should lead to strong 29%/44% EPS growth in
FY11E/FY12E.
● The stock also looks cheap at 15x FY3/12E EPS on our
estimates. We maintain OUTPERFORM with target price of
Rs600.
Strong results
HCL Tech delivered strong December 2010 results. Revenue grew
7.5% QoQ in USD terms, 1% ahead of our estimates. EBIT margin
increased 20 bp QoQ versus our estimate of a 30 bp QoQ drop. This
led to EBIT coming 6% ahead of our estimates. Lower forex losses
helped bottom line beat our estimates by 8%.
All growth engines firing
Management mentioned that the December 2010 quarter was a
record quarter in terms of total deal signings. It won 17
transformational deals in the quarter, indicating a robust environment.
While the company saw an increase in discretionary spend in the US,
it observed an increased trend of cost-reduction projects in Europe.
The rest of the world continues to grow strongly, as companies in this
region invest in growth.
The company also witnessed strong growth in both the IT services
segments: infrastructure services and core software services grew
9.4% QoQ and 7.3% QoQ, respectively. BPO also posted the second
quarter of growth, expanding by 2.9% QoQ.
Focus shifting to margin improvement
Management stated that over the next two quarters, it would focus on
margin improvement. It also maintained its target of improving
margins to the June 2010 quarter level, in CC terms (around 200 bp
improvement), by the June 2011 quarter.
Drivers for improving margins would be: (1) increasing utilisation, (2)
price increases via cost of living adjustments (COLA) in customer
contracts and (3) SG&A optimisation. BPO losses could remain
around current levels for another four quarters, with profits expected
after that.
Maintain OUTPERFORM and target price
Given the strong environment, we remain comfortable with HCL
Tech’s revenue visibility. Further, HCL Tech could have a more
leveraged model with margin improvement and lower forex losses
going forward. This should see EPS register 35% CAGR over FY3/10-
FY3/13E. At a P/E of 15x FY6/12E, the stock appears cheaper
compared to Infosys at 21x FY3/12E. Thus, we maintain our
OUTPERFORM rating with target price of Rs600.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
HCL Tech ----------------------------------------------------------------------- Maintain OUTPERFORM
Management indicates a strong focus on improving profitability
● HCL Tech delivered strong December 2010 results with
revenue/EBIT/net profit coming 1%/6%/8% above our estimates.
The growth was across verticals, geographies and services lines.
● Management indicated that it continued to see a very strong
demand environment with strong contract signings and positive
momentum on pricing.
● Management indicated that margin improvement could be the key
focus of the company over the next two quarters. The company
expects close to 200 bp margin improvement in the next two
quarters. We build in 130 bp improvement in margins by the June
2011 quarter.
● Given the strong environment, we believe HCL Tech could have
good revenue growth. Further, the company could have a more
leveraged model with: (1) margin improvement and (2) lower forex
losses. This should lead to strong 29%/44% EPS growth in
FY11E/FY12E.
● The stock also looks cheap at 15x FY3/12E EPS on our
estimates. We maintain OUTPERFORM with target price of
Rs600.
Strong results
HCL Tech delivered strong December 2010 results. Revenue grew
7.5% QoQ in USD terms, 1% ahead of our estimates. EBIT margin
increased 20 bp QoQ versus our estimate of a 30 bp QoQ drop. This
led to EBIT coming 6% ahead of our estimates. Lower forex losses
helped bottom line beat our estimates by 8%.
Management mentioned that the December 2010 quarter was a
record quarter in terms of total deal signings. It won 17
transformational deals in the quarter, indicating a robust environment.
While the company saw an increase in discretionary spend in the US,
it observed an increased trend of cost-reduction projects in Europe.
The rest of the world continues to grow strongly, as companies in this
region invest in growth.
The company also witnessed strong growth in both the IT services
segments: infrastructure services and core software services grew
9.4% QoQ and 7.3% QoQ, respectively. BPO also posted the second
quarter of growth, expanding by 2.9% QoQ.
Focus shifting to margin improvement
Management stated that over the next two quarters, it would focus on
margin improvement. It also maintained its target of improving
margins to the June 2010 quarter level, in CC terms (around 200 bp
improvement), by the June 2011 quarter.
Drivers for improving margins would be: (1) increasing utilisation, (2)
price increases via cost of living adjustments (COLA) in customer
contracts and (3) SG&A optimisation. BPO losses could remain
around current levels for another four quarters, with profits expected
after that.
Maintain OUTPERFORM and target price
Given the strong environment, we remain comfortable with HCL
Tech’s revenue visibility. Further, HCL Tech could have a more
leveraged model with margin improvement and lower forex losses
going forward. This should see EPS register 35% CAGR over FY3/10-
FY3/13E. At a P/E of 15x FY6/12E, the stock appears cheaper
compared to Infosys at 21x FY3/12E. Thus, we maintain our
OUTPERFORM rating with target price of Rs600.
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