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HCL Technologies
Expect top-line growth to remain strong, driven by market share
gains and pick-up in the SAP market
Expect company to meet its FY11 margin guidance. FY12 margin
improvement the real challenge
We remain OW with a TP of INR545
Margins, margins, margins?
HCLT’s top-line growth in the recent past has
been more than satisfactory. The company’s USD
revenues have grown at a CQGR of nearly 7.0%
in the past eight quarters, better than the peer
group (Infosys, TCS and Wipro), at near 4.0%.
We believe the strong top-line growth has been
driven by a well diversified revenue composition
and the ability of the company to share risks with
its clients and therefore win mega-deals involving
initial investments and transition costs.
We expect this steller growth to continue in the
coming quarters, as the company leverages its
IMS dominance and pick-up in the enterprise
software market.
What about margins?
While top-line growth has been a delight,
EBITDA margins have continued to decline
consistently in the past few quarters. The
company has guided for 4QFY11 margins of
18.6%, inline with the 4QFY10 margins, in
constant currency. Adjusted for currency, we
expect 4Q11 margins to be 17.6%.
In our view, while this is achievable, the real test
would be to consistently improve margins in FY12.
According to the management, they should be able
to improve margins in the medium term as they go
up the learning curve and learn to manage megadeals
more efficiently. We are expecting a 100bps
improvement in the FY12 EBITDA margins.
Valuations
The stock is currently trading at a PE of 13.5x on
our FY12e EPS. We remain OW and value HCLT
at a PE of 15x (25% discount to Infosys) on our
CY12e EPS at INR545.
Risks
Margin risk due to wage inflation and continued
investments in large deals.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
HCL Technologies
Expect top-line growth to remain strong, driven by market share
gains and pick-up in the SAP market
Expect company to meet its FY11 margin guidance. FY12 margin
improvement the real challenge
We remain OW with a TP of INR545
Margins, margins, margins?
HCLT’s top-line growth in the recent past has
been more than satisfactory. The company’s USD
revenues have grown at a CQGR of nearly 7.0%
in the past eight quarters, better than the peer
group (Infosys, TCS and Wipro), at near 4.0%.
We believe the strong top-line growth has been
driven by a well diversified revenue composition
and the ability of the company to share risks with
its clients and therefore win mega-deals involving
initial investments and transition costs.
We expect this steller growth to continue in the
coming quarters, as the company leverages its
IMS dominance and pick-up in the enterprise
software market.
What about margins?
While top-line growth has been a delight,
EBITDA margins have continued to decline
consistently in the past few quarters. The
company has guided for 4QFY11 margins of
18.6%, inline with the 4QFY10 margins, in
constant currency. Adjusted for currency, we
expect 4Q11 margins to be 17.6%.
In our view, while this is achievable, the real test
would be to consistently improve margins in FY12.
According to the management, they should be able
to improve margins in the medium term as they go
up the learning curve and learn to manage megadeals
more efficiently. We are expecting a 100bps
improvement in the FY12 EBITDA margins.
Valuations
The stock is currently trading at a PE of 13.5x on
our FY12e EPS. We remain OW and value HCLT
at a PE of 15x (25% discount to Infosys) on our
CY12e EPS at INR545.
Risks
Margin risk due to wage inflation and continued
investments in large deals.
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