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EARNINGS REVIEW
HCL Technologies Ltd. (HCLT.BO)
Buy Equity Research
Above expectations: At the cusp of sustained earnings growth; Buy
What surprised us
HCL Technologies posted 2QFY11 revenues of Rs38.9bn (up 4.9% qoq) and
net income of Rs4bn (up 21% qoq, 6%/7% above GSe/Bloomberg
consensus). EBIT margins stabilized (at 13.1%, +23 bp qoq) for the first
time after a 510 bp compression over the last five quarters. EPS beat was
attributed to lower forex losses. (1) The 6.5% volume growth was largely
driven by growth in retail (12.3% qoq) and energy (11% qoq). EU continued
to grow more than the US for the second quarter in a row, similar to the
trend witnessed by INFY/TCS, indicating the worst may be behind us. (2)
RIM revenues remained strong (+7.2% qoq), on track to meet our 36%
FY11E growth forecast. (3) We maintain our 280 bp margin
improvement forecast as we believe that there is headroom to improve
utilization (70.1% now), SG&A optimization and reduction in BPO losses.
(4) BPO business losses reduced to US$5.4mn (vs. US$7.1mn in 1Q); mgmt
guided for operating losses of about US$6mn for the next 4 quarters.
What to do with the stock
We reiterate our Buy rating with a 12-m Director’s Cut-based TP of Rs574,
implying 13% potential upside. We believe the overhang on the stock
regarding margins and hedging losses is now removed and HCL is on the
cusp of a sustainable revenue and EPS growth cycle. We expect 22%
revenue CAGR, 280 bp expansion in EBIT margin by FY13, and clean
financials to lead HCL to deliver industry leading EPS CAGR of 27% over
FY10-FY13E. We fine-tune FY11E-FY13E EPS. Stock is trading at 15.4X
FY12E P/E (26% discount to the large caps). Risk: INR appreciation.
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