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UBS Investment Research
HCL Technologies
Margins lacklustre, despite in-line revenue
„ Revenue in-line led by strong volumes, but net income disappoints
Q2 FY11 revenue at US$864m (up 7.5% QoQ) was in line with our estimate,
backed by IT services volume growth of 6.7% QoQ (UBS-e 7.0%). Revenue from
infrastructure services continued to lead growth with 9.4% QoQ, while BPO grew
3.0% QoQ. The EBITDA margin remained at 16.3%, lower than our estimate as
well as consensus. Net income at Rs3.7bn was lower than our estimate of Rs3.9bn.
„ IT Services margins main reason for disappointment; attrition increases
EBITDA margins in IT services (72% of revenue) declined 40bp QoQ to 17.5%
versus our estimate of a 130bp increase, the primary reason for the margin
disappointment during the quarter. Attrition remained relatively high with the
segment losing 2,055 employees during the quarter versus 2,248 in Q1 FY11.
„ Sharp decline in headcount addition could imply slower Q3 volume growth
Gross employee additions in IT services declined to 3,530 from 6,595 in Q1 FY11,
the lowest in the past four quarters. Employee additions for Infosys and TCS
remained relatively firm, despite lower attrition during the December quarter. We
believe Q3 volume growth for HCL Tech could be slower than Q2’s. This could
also imply higher lateral hiring to service volume growth (utilisation up by 1% to
75% in Q2).
„ Valuation: maintain Sell, valuation discount to Infosys could widen
HCL Tech is currently trading at an 18% PE discount to Infosys (Mar 12), lower
than the 25% average over the past three years. We expect this to widen due to the
growing margin differential between HCL and Infosys/TCS, without a significantly
large revenue growth outperformance. We maintain our Sell rating with a DCFbased price target of Rs385.
Q HCL Technologies
HCL Tech is a leading Indian IT Services company with US$2.2bn revenue and
around 55,000 employees in FY09. The company focuses on technology and
R&D outsourcing and provides technology development services (development,
redevelopment and maintenance of software); enterprise application services;
infrastructure services; and BPO.
Q Statement of Risk
A sharp decline in IT Services spending could result in downward revision of
our earnings estimates.
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