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HCL Technologies |
In line quarter, retain HOLD |
HOLD
CMP: Rs 508 Target Price: Rs 540
n Inline results with revenues at US$ 864 mn (+7.5% QoQ) , mgns improving by ~10 bps QoQ to 15.7% (V/s exp of ~40 bps increase). Pfts in line at Rs 3.7 bn (+25%QoQ, +37% YoY)
n Apps and IMS drive revenue growth at ~7.3%/9.4% QoQ increase. Top 5 clients grow by ~2% QoQ while top 5-10 grow by ~15.4% sequentially
n See ‘no xing’ to QoQ margin improvement (wasn’t that expected after a steep ~640 bps decline over the past 5 quarters?)
n Increase our FY12/13E EPS by 6.8%/4.1% to Rs 31.9/38.4 aided primarily by currency resets. HOLD with a revised TPof Rs 540, based on 14xFY13E earnings( V/s Rs 430 earlier)
In line results, margin fall stalled after 4 quarters
HCLT reported rev at US$864 mn (+7.5% QoQ marginally ahead of Emkay est (US$
858 mn). Op mgns (including ESOP charge) were at ~15.7% , up ~10 bps QoQ ,
stalling a 4 quarter trend of falling mgns. Profits at Rs 3.7 bn (+25% QoQ) were in
line with Emkay est. helped by lower than expected forex losses. Net addition was
relatively weak at ~2,049 after strong additions over the past 2 quarters. Rev growth
was led by Apps (+7.3% QoQ, 6.7% vol growth), IMS (+9.4% QoQ) with BPO also a 3%
sequential increase with cross currency gains.
‘Xing’ in the QoQ margin improvement?
HCL T’s margins improved by ~10 bps QoQ to 15.7%, bringing to end a 4 quarter streak
of fall in margins (note that HCL Tech’s op mgns have slid by ~640 bps since Sep’09 qtr
as compared to ~140 bps decline for Infy/~150 bps improvement for TCS), note that
margins aided QoQ by ~21 bps on a/c of lower losses in BPO. Management indicated
that it would work towards taking margins up over the next 2 qtrs (as expected) with
help from higher utilization/lower hiring, lower losses in BPO and some SG&A leverage
(we build in margins improving by ~220 bps over the next 2 qtrs). We appreciate
HCLT’s move of aggressive lateral hiring ahead of peers however see it as more of a
continuation of it’s strategy of hiring more laterals V/s greater proportion of fresher hiring
for peers. We believe that HCLT will face stiffer margin headwinds in an
increasingly tight supply environment (and more so at the experienced end).
Further given HCLT ’s aggressive pursuit at new client additions unlike a more
focused client mining ploy at Infy and TCS will limit meaningful SG&A leverage
ahead
Sharp stock up move limits significant upside
We tweak our earnings model for marginally higher US$ rev (we build in a 23.7%/20%
YoY growth in rev V/s ~22%/20% earlier for FY12/13), reset our US$/INR assumptions
to Rs 45/$(V/s Rs 44/$ earlier) driving a 6.8/4.1% increase in FY12/13E earnings to Rs
31.9/38.4. We roll forward to FY13 EPS thereby resetting TP at Rs 540, based on 14x
FY13E earnings (V/s Rs 430 earlier). We see no reason to back the optimism on
HCLT’s valuations converging to other Tier 1 players driven by higher margin volatility,
lower CFO/EBITDA thouroughput despite higher than peers revenue growth
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