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HCL Technologies Ltd. (HCLT.BO)
Buy Equity Research
At the cusp of sustained earnings growth – Part II; maintain Buy
What's changed
HCLT has been the best performer in our IT services coverage ytd, up 20%
vs. the IT sector (18% vs. Sensex). Despite this outperformance, we
reiterate our Buy rating on HCLT as we believe that 3QFY11 results
reinforce its ability to deliver sustained revenue growth (5.8% CQGR over
the past two years). We also believe that our margin recovery thesis is
playing out, as EBIT margins rose by 130 bp; and would revert to 16% by
FY13E, in our view. We revise our FY11E-FY13E EPS by up to 5%.
Implications
(1) We expect HCL to maintain its strong topline growth over the next few
quarters as deal wins ramp up and forecast 32%/26% US$ revenue growth
in FY11E/FY12E. (2) We believe HCL is on track to deliver management
guidance of 15.3% margins by 4QFY11. We expect these margin levels to
sustain in FY12E/FY13E owing to normalization of attrition and wage levels,
recovery in BPO business, higher offshore mix, stabilizing SG&A and scale
benefits. We expect this to further strengthen investor confidence in
management’s execution capability. (3) From 2QFY11 onwards, HCL’s
earnings do not include the legacy hedging losses which had masked the
profitability for the past two years. We believe that culmination of these
factors will result in an EPS CAGR of 29% over FY11E-FY13E.
Valuation
We raise our 12-month Director’s Cut-based TP to Rs590 (from Rs574),
with 14% potential upside. Our TP implies a P/E of 17.4X on FY12E EPS of
Rs33.99, a 20% discount to our large cap Indian IT services coverage. HCL
is trading at 15.2X FY12E P/E, which is inline with its 6-year historical
trading average. We expect the stock to trade at a premium to its historical
average given the strong revenue and earnings CAGR of 21%/29% (large
caps at 23%/21%) that we forecast over FY11E-FY13E.
Key risks
Slower-than-expected economic recovery, INR appreciation.
INVESTMENT LIST MEMBERSHIP
Asia Pacific Buy List
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
HCL Technologies Ltd. (HCLT.BO)
Buy Equity Research
At the cusp of sustained earnings growth – Part II; maintain Buy
What's changed
HCLT has been the best performer in our IT services coverage ytd, up 20%
vs. the IT sector (18% vs. Sensex). Despite this outperformance, we
reiterate our Buy rating on HCLT as we believe that 3QFY11 results
reinforce its ability to deliver sustained revenue growth (5.8% CQGR over
the past two years). We also believe that our margin recovery thesis is
playing out, as EBIT margins rose by 130 bp; and would revert to 16% by
FY13E, in our view. We revise our FY11E-FY13E EPS by up to 5%.
Implications
(1) We expect HCL to maintain its strong topline growth over the next few
quarters as deal wins ramp up and forecast 32%/26% US$ revenue growth
in FY11E/FY12E. (2) We believe HCL is on track to deliver management
guidance of 15.3% margins by 4QFY11. We expect these margin levels to
sustain in FY12E/FY13E owing to normalization of attrition and wage levels,
recovery in BPO business, higher offshore mix, stabilizing SG&A and scale
benefits. We expect this to further strengthen investor confidence in
management’s execution capability. (3) From 2QFY11 onwards, HCL’s
earnings do not include the legacy hedging losses which had masked the
profitability for the past two years. We believe that culmination of these
factors will result in an EPS CAGR of 29% over FY11E-FY13E.
Valuation
We raise our 12-month Director’s Cut-based TP to Rs590 (from Rs574),
with 14% potential upside. Our TP implies a P/E of 17.4X on FY12E EPS of
Rs33.99, a 20% discount to our large cap Indian IT services coverage. HCL
is trading at 15.2X FY12E P/E, which is inline with its 6-year historical
trading average. We expect the stock to trade at a premium to its historical
average given the strong revenue and earnings CAGR of 21%/29% (large
caps at 23%/21%) that we forecast over FY11E-FY13E.
Key risks
Slower-than-expected economic recovery, INR appreciation.
INVESTMENT LIST MEMBERSHIP
Asia Pacific Buy List
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