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HCL Technologies -Consistent performance warrants re-rating…
Since Q1CY09, HCL continued to report revenue growth in line with
industry average (Figure 1) while, concurrently, operational headwinds
continued to abate with the likely sunset of hedging losses. We believe
a 24% and 28% P/E multiple discount relative to Infosys and TCS
assuming consensus FY12E EPS estimates is unwarranted pending a
likely improvement in operational metric. Consequently, we have raised
our target multiple to 18x (15x earlier), an average 20% discount, (to
account for inferior EBITDA margins relative to peers) and have raised
our target price to | 570 vs. | 477 earlier.
Valuation
HCL reported another stellar quarter and is well positioned to participate
in incremental demand, improve its operational performance with low
utilisation coupled with superior lateral gross hires. Consequently, we
have raised our target multiple to 18x vs. 15x earlier to account for better
revenue visibility in the core business and raised our price target to | 570
(| 477 earlier). We maintain our BUY rating on the stock.
ƒ Revenue, EPS beat
HCL Technologies reported its Q2FY11 numbers, which beat our as
well as consensus estimates. HCL reported Q2FY11 revenues of |
3,863 crore (7% QoQ growth vs. our 4.9% QoQ estimate) and
reported EBITDA of | 631 crore on an EBITDA margin of 16.3% (in
line with our 16.4% estimate). Net income of | 397 crore was also
ahead of our | 357 crore estimate, aided by higher other income
relative to our estimate.
ƒ Operating metric trends
Banking, financial services & insurance, 24.6% of revenues, grew
3.3% QoQ in constant currency (CC) vs. 7.2% in Q1FY11. Retail &
manufacturing grew 14.2% and 6.7% QoQ, respectively, led by
continued demand from consumer electronics. Telecom continues
to do well with 5% QoQ growth. Europe grew 5.8% QoQ on the
back of 13.4% QoQ growth in Q1FY11, as it continues to spend on
run-the-business (RTB) metric. Asia saw a strong demand uptick and
grew 11% QoQ. Americas grew 6.5% QoQ. Noticeably, the
company saw demand traction in Japan, US and Europe. Active
client relationships increased by eight to 434 vs. 426 in Q1FY11. HCL
signed 17 (14 previous quarter) multi-year, multi-million deals in
Q2FY11 coupled with 8,379 gross additions in Q2FY11. IT services
attrition modestly increased to 17.2% vs. 16.7% in Q1FY11. Finally,
HCL continues to operate at 70% utilisation (offshore including
trainees) compared to its peak of 76.4% in Q2FY10.
Valuation
We believe HCL is well poised to gain from potential incremental demand
given its operating leverage and expect the company to grow revenues at
17.4% CAGR over FY10-FY12E. BPO restructuring would continue for
another four quarters with likely negative EBIT margins. Subsequently, we
are modelling 18.9% EBITDA margins in FY12E as SG&A investments
yield meaningful result and BPO attempts to break even. Consequently,
we have applied an average 20% discount (to account for inferior EBITDA
margins relative to Infosys and TCS) to HCL’s target P/E multiple and
value HCL Tech at | 570, 18xFY12E EPS estimate of | 31.8. We maintain
our BUY rating on the stock.
Risk & Concerns
Though the pound, euro and Australian dollar created tailwinds in
Q2FY11, cross currency volatility remains a key concern. The 9MFY11
(starting April) average rupee/$ rate stood at 45.6. Were the rate to remain
at today’s levels for the remainder of the year, the average rupee/$ rate
could be 45.5 for FY11E vs. 47.3 for FY10, or an appreciation of ~3.8%.
Incremental appreciation from these levels would create downside risks
to our estimates. As a reminder, every 100 bps movement in the currency
impacts operating margin by ~20-50 bps depending on the operating
model.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
HCL Technologies -Consistent performance warrants re-rating…
Since Q1CY09, HCL continued to report revenue growth in line with
industry average (Figure 1) while, concurrently, operational headwinds
continued to abate with the likely sunset of hedging losses. We believe
a 24% and 28% P/E multiple discount relative to Infosys and TCS
assuming consensus FY12E EPS estimates is unwarranted pending a
likely improvement in operational metric. Consequently, we have raised
our target multiple to 18x (15x earlier), an average 20% discount, (to
account for inferior EBITDA margins relative to peers) and have raised
our target price to | 570 vs. | 477 earlier.
Valuation
HCL reported another stellar quarter and is well positioned to participate
in incremental demand, improve its operational performance with low
utilisation coupled with superior lateral gross hires. Consequently, we
have raised our target multiple to 18x vs. 15x earlier to account for better
revenue visibility in the core business and raised our price target to | 570
(| 477 earlier). We maintain our BUY rating on the stock.
ƒ Revenue, EPS beat
HCL Technologies reported its Q2FY11 numbers, which beat our as
well as consensus estimates. HCL reported Q2FY11 revenues of |
3,863 crore (7% QoQ growth vs. our 4.9% QoQ estimate) and
reported EBITDA of | 631 crore on an EBITDA margin of 16.3% (in
line with our 16.4% estimate). Net income of | 397 crore was also
ahead of our | 357 crore estimate, aided by higher other income
relative to our estimate.
ƒ Operating metric trends
Banking, financial services & insurance, 24.6% of revenues, grew
3.3% QoQ in constant currency (CC) vs. 7.2% in Q1FY11. Retail &
manufacturing grew 14.2% and 6.7% QoQ, respectively, led by
continued demand from consumer electronics. Telecom continues
to do well with 5% QoQ growth. Europe grew 5.8% QoQ on the
back of 13.4% QoQ growth in Q1FY11, as it continues to spend on
run-the-business (RTB) metric. Asia saw a strong demand uptick and
grew 11% QoQ. Americas grew 6.5% QoQ. Noticeably, the
company saw demand traction in Japan, US and Europe. Active
client relationships increased by eight to 434 vs. 426 in Q1FY11. HCL
signed 17 (14 previous quarter) multi-year, multi-million deals in
Q2FY11 coupled with 8,379 gross additions in Q2FY11. IT services
attrition modestly increased to 17.2% vs. 16.7% in Q1FY11. Finally,
HCL continues to operate at 70% utilisation (offshore including
trainees) compared to its peak of 76.4% in Q2FY10.
Valuation
We believe HCL is well poised to gain from potential incremental demand
given its operating leverage and expect the company to grow revenues at
17.4% CAGR over FY10-FY12E. BPO restructuring would continue for
another four quarters with likely negative EBIT margins. Subsequently, we
are modelling 18.9% EBITDA margins in FY12E as SG&A investments
yield meaningful result and BPO attempts to break even. Consequently,
we have applied an average 20% discount (to account for inferior EBITDA
margins relative to Infosys and TCS) to HCL’s target P/E multiple and
value HCL Tech at | 570, 18xFY12E EPS estimate of | 31.8. We maintain
our BUY rating on the stock.
Risk & Concerns
Though the pound, euro and Australian dollar created tailwinds in
Q2FY11, cross currency volatility remains a key concern. The 9MFY11
(starting April) average rupee/$ rate stood at 45.6. Were the rate to remain
at today’s levels for the remainder of the year, the average rupee/$ rate
could be 45.5 for FY11E vs. 47.3 for FY10, or an appreciation of ~3.8%.
Incremental appreciation from these levels would create downside risks
to our estimates. As a reminder, every 100 bps movement in the currency
impacts operating margin by ~20-50 bps depending on the operating
model.
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