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HCL Technologies (Rs507.90) /BPO Turnaround to Help Margins;
OW, Raise PT
We maintain our Overweight rating on HCLT and raise our price target to Rs585: Dec-10
quarter results delivered on the high revenue growth expectations. Lower losses in BPO, overall
margin improvement and lower FX losses helped 24% QoQ net profit growth. Management
indicated the company’s focus to improve margins in F2H11 with industry average revenue
growth. HCLT expects to improve margins to 14.6%, +150bp from the current levels b F4Q11.
Why Overweight? HCLT has been growing revenue in line with its larger peers and has the
highest earnings CAGR over F2011-13e within our coverage universe. We believe consensus
F2012-13 revenue forecasts are conservative and could have upside. We are 7-9% ahead of
consensus revenue estimates and ~3% higher than consensus earnings. We forecast that EBIT
margins to improve by ~100bp in F2012. Our estimates could turn out to be conservative if
HCLT’s margin performance is better than expected.
Financials: We forecast 23% and 21% US$ revenue growth in F2012 and F2013, respectively.
We expect EBIT margins to move up to 14.4% (+100bp) next year as BPO becomes profitable
with company-level margins next year. Over the last two years, HCLT has reported FX losses of
US$100-110mn (~40% of net profit). With the hedges declining to US$256mn, lower FX losses
are likely to help HCLT deliver an EBIT CAGR of 30% and net profit CAGR of 28% for F2011-13e.
Valuations: The stock trades at a P/E of 16x F2012e and 13x F2013e, a 25-28% discount to
Infosys. Historically, HCLT has traded at an average discount of 25% to larger vendors and with a
range of 20-50%.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
HCL Technologies (Rs507.90) /BPO Turnaround to Help Margins;
OW, Raise PT
We maintain our Overweight rating on HCLT and raise our price target to Rs585: Dec-10
quarter results delivered on the high revenue growth expectations. Lower losses in BPO, overall
margin improvement and lower FX losses helped 24% QoQ net profit growth. Management
indicated the company’s focus to improve margins in F2H11 with industry average revenue
growth. HCLT expects to improve margins to 14.6%, +150bp from the current levels b F4Q11.
Why Overweight? HCLT has been growing revenue in line with its larger peers and has the
highest earnings CAGR over F2011-13e within our coverage universe. We believe consensus
F2012-13 revenue forecasts are conservative and could have upside. We are 7-9% ahead of
consensus revenue estimates and ~3% higher than consensus earnings. We forecast that EBIT
margins to improve by ~100bp in F2012. Our estimates could turn out to be conservative if
HCLT’s margin performance is better than expected.
Financials: We forecast 23% and 21% US$ revenue growth in F2012 and F2013, respectively.
We expect EBIT margins to move up to 14.4% (+100bp) next year as BPO becomes profitable
with company-level margins next year. Over the last two years, HCLT has reported FX losses of
US$100-110mn (~40% of net profit). With the hedges declining to US$256mn, lower FX losses
are likely to help HCLT deliver an EBIT CAGR of 30% and net profit CAGR of 28% for F2011-13e.
Valuations: The stock trades at a P/E of 16x F2012e and 13x F2013e, a 25-28% discount to
Infosys. Historically, HCLT has traded at an average discount of 25% to larger vendors and with a
range of 20-50%.
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