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Margin improvement and growth go hand in hand
dispelling fears
HCL reported a revenue growth of 5.8% QoQ in USD backed
by volume growth of 4.9%. EBITDA margin expanded by
100bps. Healthy volume growth would help dispel some of
the gloom surrounding Infosys’s guidance and fears that
HCLT is capable of focusing on only one aspect at a time –
either margin or growth and not both together. Company’s
investment into SG&A and lateral hires is paying off now.
However post today’s strong run up, the stock is trading at
15x FY13E which we believe is fair considering it has among
the lowest margins (half that of Infosys’s) in the Indian IT
services large cap space. Our view is that margins will likely
remain at current levels at best. Besides we believe capital
intensity for HCLT is almost twice that of Infosys’s. Of course
due to all these compromises, growth has been among the
best over the last many quarters. We maintain our Hold
rating.
Early investment in sales helping growth and margins:
HCL reported a 5.8% sequential topline growth in USD which
was largely inline with our expectations. Revenue growth was
led by 4.9% volume growth. EBITDA margin improved by
100bps due to lower SG&A. Software services and
Infrastructure services grew by 6% and 9% respectively while
BPO was flat.
BFSI/IMS leading growth: BFSI (12.6% qoq) driven by
integration deals and IMS (8.6% qoq) led the growth for HCL
in this quarter. Application services has also seen good
growth in the quarter while Engineering and R&D services
remained muted due to the impact of Japan.
Restructured contracts driving demand for HCLT: With the
macro environment still challenging, management said that
most of the new wins (~75%) will likely come from vendor
churn rather than new outsourcing deals going ahead. This
would mean that pricing uptick in FY12 is highly unlikely – at
least in the case of HCLT
Outlook
Management said that the micro environment remains uncertain. Some of the macro environment
challenges are uncertain growth environment in developed world, currency volatility, geo-political
issues in certain part of the world, increasing competitiveness and probable mismatch in the supply
and demand of talent base in India. We maintain our cautious stance on the sector and believe FY12
could at best be a normal year with 18-22% growth for the industry. Management said in their
commentary that most of the new wins will likely come from vendor churning rather than new
outsourcing deals going ahead. This is in line with our theory that the competitive intensity with
global MNC players would likely go up (please refer to our initiation piece “Focus on the macro and
not the micro” dated 20th Oct 2010). This would mean that pricing uptick in FY12 is highly unlikely –
at least in the case of HCLT
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Margin improvement and growth go hand in hand
dispelling fears
HCL reported a revenue growth of 5.8% QoQ in USD backed
by volume growth of 4.9%. EBITDA margin expanded by
100bps. Healthy volume growth would help dispel some of
the gloom surrounding Infosys’s guidance and fears that
HCLT is capable of focusing on only one aspect at a time –
either margin or growth and not both together. Company’s
investment into SG&A and lateral hires is paying off now.
However post today’s strong run up, the stock is trading at
15x FY13E which we believe is fair considering it has among
the lowest margins (half that of Infosys’s) in the Indian IT
services large cap space. Our view is that margins will likely
remain at current levels at best. Besides we believe capital
intensity for HCLT is almost twice that of Infosys’s. Of course
due to all these compromises, growth has been among the
best over the last many quarters. We maintain our Hold
rating.
Early investment in sales helping growth and margins:
HCL reported a 5.8% sequential topline growth in USD which
was largely inline with our expectations. Revenue growth was
led by 4.9% volume growth. EBITDA margin improved by
100bps due to lower SG&A. Software services and
Infrastructure services grew by 6% and 9% respectively while
BPO was flat.
BFSI/IMS leading growth: BFSI (12.6% qoq) driven by
integration deals and IMS (8.6% qoq) led the growth for HCL
in this quarter. Application services has also seen good
growth in the quarter while Engineering and R&D services
remained muted due to the impact of Japan.
Restructured contracts driving demand for HCLT: With the
macro environment still challenging, management said that
most of the new wins (~75%) will likely come from vendor
churn rather than new outsourcing deals going ahead. This
would mean that pricing uptick in FY12 is highly unlikely – at
least in the case of HCLT
Outlook
Management said that the micro environment remains uncertain. Some of the macro environment
challenges are uncertain growth environment in developed world, currency volatility, geo-political
issues in certain part of the world, increasing competitiveness and probable mismatch in the supply
and demand of talent base in India. We maintain our cautious stance on the sector and believe FY12
could at best be a normal year with 18-22% growth for the industry. Management said in their
commentary that most of the new wins will likely come from vendor churning rather than new
outsourcing deals going ahead. This is in line with our theory that the competitive intensity with
global MNC players would likely go up (please refer to our initiation piece “Focus on the macro and
not the micro” dated 20th Oct 2010). This would mean that pricing uptick in FY12 is highly unlikely –
at least in the case of HCLT
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