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● HCL Tech results were excellent with a positive surprise on
margins (up 130 bps QoQ) and good revenue growth (5.8% QoQ).
Revenue/EBIT/PAT were 2%/10%/13% ahead of our estimates.
● Management reiterated its view that EBIT margins should be
close to 15.5% in the Jun-11 quarter. Given strong margin
performance in the Mar-11 quarter, we believe that investors will
gain confidence in the company’s ability to deliver margins.
● Although BPO losses reduced in the quarter, this business still
remains in investment mode. We thus continue to build EBIT loss
of US$13.8 mn over next three quarters in BPO.
● Geographical revenue breakdown clearly indicates that the US
was slow in the quarter with 0.7% QoQ growth. However, strong
performance in emerging markets and Europe helped HCL Tech.
● Following the results, we largely maintain our EPS estimates but
increase our target price to Rs640, as we roll forward our model.
We maintain our OUTPERFORM rating on the stock.
Strong results
HCL Tech reported excellent results with a strong 130 bp QoQ
improvement in margins being a positive surprise. BPO losses also
reduced slightly. Management is clearly delivering on its promise of
margin recovery ahead of time.
Revenue growth was also impressive at 5.8% QoQ (US$ based).
Reflecting the weak revenue growth of Infosys, HCL Tech’s revenues
from the Americas grew a meagre 0.7%. However, a better portfolio
mix, a strong showing by emerging markets and good growth in
Europe helped the company.
With better-than-expected revenue growth and margin improvement,
EBIT came in 10% ahead of our estimates. Forex losses were lower
than estimated and other non-operating income was higher. This led
to profits growing 16% QoQ, 35% YoY to US$103 mn, 13% ahead of
estimates.
Guidance of min. 100 bp margin improvement next quarter
Management indicated that it is on track to deliver margins for the
quarter ending Jun-11 at the same level as that for the quarter ending
Jun-10 on a CC basis. It further commented that this implies at least a
100 bp improvement in the next quarter at a 31 March exchange rate.
All engines firing
IT services revenue grew 6.2% QoQ with both core IT (5.4% QoQ)
and infrastructure (8.6% QoQ) continuing strong growth momentum.
Management believes this indicates customer confidence in its
outsourcing model and ability to cross-sell services to its customers.
BPO remains in investment mode with an expected EBIT loss of
US$5 mn/quarter over the next three quarters. Management reiterated
its confidence in the huge potential of platform BPO.
Reiterate our OUTPERFORM
We make slight changes to the model to incorporate the strong results
of this quarter and management commentary. Rolling forward our
model leads to a target price of Rs640 (from Rs600)
Given the strong environment, we remain comfortable with HCL
Tech’s revenue visibility. Further, HCL Tech could have a more
leveraged model with margin improvement and lower forex losses in
future. Thus, EPS registers a 35% CAGR over FY6/10-6/13E.
Strong results should result in consensus upgrades and multiple
improvement, as investors gain confidence in HCL Tech’s ability to
deliver growth and margins. We reiterate our OUTPERFORM rating.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
● HCL Tech results were excellent with a positive surprise on
margins (up 130 bps QoQ) and good revenue growth (5.8% QoQ).
Revenue/EBIT/PAT were 2%/10%/13% ahead of our estimates.
● Management reiterated its view that EBIT margins should be
close to 15.5% in the Jun-11 quarter. Given strong margin
performance in the Mar-11 quarter, we believe that investors will
gain confidence in the company’s ability to deliver margins.
● Although BPO losses reduced in the quarter, this business still
remains in investment mode. We thus continue to build EBIT loss
of US$13.8 mn over next three quarters in BPO.
● Geographical revenue breakdown clearly indicates that the US
was slow in the quarter with 0.7% QoQ growth. However, strong
performance in emerging markets and Europe helped HCL Tech.
● Following the results, we largely maintain our EPS estimates but
increase our target price to Rs640, as we roll forward our model.
We maintain our OUTPERFORM rating on the stock.
Strong results
HCL Tech reported excellent results with a strong 130 bp QoQ
improvement in margins being a positive surprise. BPO losses also
reduced slightly. Management is clearly delivering on its promise of
margin recovery ahead of time.
Revenue growth was also impressive at 5.8% QoQ (US$ based).
Reflecting the weak revenue growth of Infosys, HCL Tech’s revenues
from the Americas grew a meagre 0.7%. However, a better portfolio
mix, a strong showing by emerging markets and good growth in
Europe helped the company.
With better-than-expected revenue growth and margin improvement,
EBIT came in 10% ahead of our estimates. Forex losses were lower
than estimated and other non-operating income was higher. This led
to profits growing 16% QoQ, 35% YoY to US$103 mn, 13% ahead of
estimates.
Guidance of min. 100 bp margin improvement next quarter
Management indicated that it is on track to deliver margins for the
quarter ending Jun-11 at the same level as that for the quarter ending
Jun-10 on a CC basis. It further commented that this implies at least a
100 bp improvement in the next quarter at a 31 March exchange rate.
All engines firing
IT services revenue grew 6.2% QoQ with both core IT (5.4% QoQ)
and infrastructure (8.6% QoQ) continuing strong growth momentum.
Management believes this indicates customer confidence in its
outsourcing model and ability to cross-sell services to its customers.
BPO remains in investment mode with an expected EBIT loss of
US$5 mn/quarter over the next three quarters. Management reiterated
its confidence in the huge potential of platform BPO.
Reiterate our OUTPERFORM
We make slight changes to the model to incorporate the strong results
of this quarter and management commentary. Rolling forward our
model leads to a target price of Rs640 (from Rs600)
Given the strong environment, we remain comfortable with HCL
Tech’s revenue visibility. Further, HCL Tech could have a more
leveraged model with margin improvement and lower forex losses in
future. Thus, EPS registers a 35% CAGR over FY6/10-6/13E.
Strong results should result in consensus upgrades and multiple
improvement, as investors gain confidence in HCL Tech’s ability to
deliver growth and margins. We reiterate our OUTPERFORM rating.
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