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HCL Technologies (HCLT.BO)
3Q FY11 – Strong Results on All Counts
Revenue growth momentum continues — HCLT reported revenues of US$915m, up
~6% qoq (CIRA: US$907m). Growth was strong across segments. Infrastructure
Services continued to lead with another strong quarter, IT Services did well and BPO
was flattish QoQ. Sluggish growth in the US (flattish qoq) was the only concern – both
from a sector and a stock perspective.
Margins expanded ~100bps; tracking guidance well — Margins expanded ~100bps
qoq – a mix of better pricing, higher utilization and slightly lower SG&A. HCLT
management had earlier indicated that 4Q FY11 margins will be similar to 4Q FY10.
The improvement suggests that it is on track to achieve it.
Infrastructure Services growth continues to surprise — Infrastructure Services
revenues were up ~9% qoq – strong growth given that the base is also quite significant
now (revenues of $214m in 3Q). IT Services growth was pretty decent at ~5.4% qoq –
volumes improved ~5% qoq while pricing also inched up.
BPO – investments seem to have started to help — BPO continues to be in
investment mode. Management expects to continue investing ~US$5m/quarter over the
next few quarters. However, the announcement of 3 large deals (out of a total of 11
deals in the quarter) in business services does suggests that the segment is moving in
the right direction. HCLT management continues to believe that investments should be
able to position BPO as the next big growth driver for HCLT over the medium term.
HCLT continues to deliver; remains one of our preferred picks — HCLT has been
one of the fastest growing companies over many quarters. Q3 should address investor
concerns on margins and the trend should continue in Q4 as well. Some consensus
upgrades should follow. The stock has done well with a ~45% return in the last one
year and remains one of our top picks in the Indian IT Services space.
Other Key Highlights
Cashflow from operations of US$117.5m in the quarter with a capex of
US$45.5m.
Company repaid US$34m of debt with the net debt now reducing to US$70m
(US$110m last quarter).
Receivables (including unbilled revenues) increased to US$746m, up ~1% qoq.
Quarterly dividend maintained at Rs2 per share.
All comparisons below are in constant currency
– Among geographies, growth was led by Europe and Asia Pacific at 4.2% and
20.5% qoq respectively while Americas was sluggish at 0.7% qoq.
– In Services, growth was led by Infrastructure Services, Enterprise Application
Services and Custom Application Services at 7.7%, 5.7% and 5.1% qoq
respectively while Engineering and R&D Services was slow at 1.6% qoq.
– Among Verticals, Financial Services, Energy-Utilities-Public Sector and
Manufacturing led growth with 10.5%, 6.3% and 6.1% qoq respectively while
Media Publishing & Entertainment, Retail & CPG and Telecom were slow at
1.7%, -0.4% and -0.3% qoq respectively.
HCL acquired certain software assets (used to provide securities and fund
services) from Citi. The acquisition is for a total consideration of US$26m (funded
by internal accruals). HCL is taking over 41 employees and an assured revenue
stream of US$135m over 10 years. This deal would start from mid-Q4 and would
accrue equally over the term of the deal.
HCL Technologies
Company description
HCL Technologies (HCLT) is the fifth-largest Indian IT services company. Founded
in 1991, HCLT focused on technology and R&D outsourcing before diversifying into
enterprise applications. In the infrastructure business, it has been gradually shifting
focus from domestic sales to global services. In BPO, it boasts strong ties with
British Telecom. The company leverages off its extensive offshore infrastructure and
its global network to deliver solutions across verticals including Banking, Insurance,
Retail, Consumer, Aerospace, Automotive, Semiconductors, Telecom and Life
Sciences. HCLT has ~430 clients across verticals and a workforce of more than
70,000.
Investment strategy
We rate HCLT shares Buy/Low Risk (1L). HCLT has been at the forefront of
pursuing large deals, announcing ~US$3.5bn of large deals in FY09-10. A
significant presence across IT Services, BPO and IMS has helped HCLT qualify for
multi-year outsourcing deals. IMS, R&D and BPO service offerings should enable it
to post strong revenue growth, although BPO could be impacted in the near term as
the company tries to restructure it. The Axon acquisition helps HCLT in filling up the
gap in Enterprise Services, where HCLT was lagging its peers. With ERP showing
signs of recovery, we expect Axon to start contributing to growth in the coming
quarters. We forecast ~26% revenue ($ terms) and ~30% EPS CAGRs in FY10-13.
Valuation
Our target price is Rs560 based on 18x Jun 12E EPS. This is higher than the midpoint
of the 5-20x band that the stock has traded in over the past three years. We
believe a higher multiple is justified given improving macro and potential benefits
arising out of the Axon acquisition. We believe PE remains the most appropriate
valuation measure given HCLT's profitable track record.
Risks
We rate HCLT shares Low Risk, which is in line with our quantitative risk-rating
system as the company has significant scale, enjoys a good brand name and
continues to generate significant FCF. Key downside risks that could impede the
stock from reaching our target price include: (1) any significant appreciation of the
rupee against the USD/EUR/GBP; (2) a sharp slowdown in the US/Global economy;
(3) acquisition-related risks; and (4) the strategy of pursuing large deals could have
negative margin implications.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
HCL Technologies (HCLT.BO)
3Q FY11 – Strong Results on All Counts
Revenue growth momentum continues — HCLT reported revenues of US$915m, up
~6% qoq (CIRA: US$907m). Growth was strong across segments. Infrastructure
Services continued to lead with another strong quarter, IT Services did well and BPO
was flattish QoQ. Sluggish growth in the US (flattish qoq) was the only concern – both
from a sector and a stock perspective.
Margins expanded ~100bps; tracking guidance well — Margins expanded ~100bps
qoq – a mix of better pricing, higher utilization and slightly lower SG&A. HCLT
management had earlier indicated that 4Q FY11 margins will be similar to 4Q FY10.
The improvement suggests that it is on track to achieve it.
Infrastructure Services growth continues to surprise — Infrastructure Services
revenues were up ~9% qoq – strong growth given that the base is also quite significant
now (revenues of $214m in 3Q). IT Services growth was pretty decent at ~5.4% qoq –
volumes improved ~5% qoq while pricing also inched up.
BPO – investments seem to have started to help — BPO continues to be in
investment mode. Management expects to continue investing ~US$5m/quarter over the
next few quarters. However, the announcement of 3 large deals (out of a total of 11
deals in the quarter) in business services does suggests that the segment is moving in
the right direction. HCLT management continues to believe that investments should be
able to position BPO as the next big growth driver for HCLT over the medium term.
HCLT continues to deliver; remains one of our preferred picks — HCLT has been
one of the fastest growing companies over many quarters. Q3 should address investor
concerns on margins and the trend should continue in Q4 as well. Some consensus
upgrades should follow. The stock has done well with a ~45% return in the last one
year and remains one of our top picks in the Indian IT Services space.
Other Key Highlights
Cashflow from operations of US$117.5m in the quarter with a capex of
US$45.5m.
Company repaid US$34m of debt with the net debt now reducing to US$70m
(US$110m last quarter).
Receivables (including unbilled revenues) increased to US$746m, up ~1% qoq.
Quarterly dividend maintained at Rs2 per share.
All comparisons below are in constant currency
– Among geographies, growth was led by Europe and Asia Pacific at 4.2% and
20.5% qoq respectively while Americas was sluggish at 0.7% qoq.
– In Services, growth was led by Infrastructure Services, Enterprise Application
Services and Custom Application Services at 7.7%, 5.7% and 5.1% qoq
respectively while Engineering and R&D Services was slow at 1.6% qoq.
– Among Verticals, Financial Services, Energy-Utilities-Public Sector and
Manufacturing led growth with 10.5%, 6.3% and 6.1% qoq respectively while
Media Publishing & Entertainment, Retail & CPG and Telecom were slow at
1.7%, -0.4% and -0.3% qoq respectively.
HCL acquired certain software assets (used to provide securities and fund
services) from Citi. The acquisition is for a total consideration of US$26m (funded
by internal accruals). HCL is taking over 41 employees and an assured revenue
stream of US$135m over 10 years. This deal would start from mid-Q4 and would
accrue equally over the term of the deal.
HCL Technologies
Company description
HCL Technologies (HCLT) is the fifth-largest Indian IT services company. Founded
in 1991, HCLT focused on technology and R&D outsourcing before diversifying into
enterprise applications. In the infrastructure business, it has been gradually shifting
focus from domestic sales to global services. In BPO, it boasts strong ties with
British Telecom. The company leverages off its extensive offshore infrastructure and
its global network to deliver solutions across verticals including Banking, Insurance,
Retail, Consumer, Aerospace, Automotive, Semiconductors, Telecom and Life
Sciences. HCLT has ~430 clients across verticals and a workforce of more than
70,000.
Investment strategy
We rate HCLT shares Buy/Low Risk (1L). HCLT has been at the forefront of
pursuing large deals, announcing ~US$3.5bn of large deals in FY09-10. A
significant presence across IT Services, BPO and IMS has helped HCLT qualify for
multi-year outsourcing deals. IMS, R&D and BPO service offerings should enable it
to post strong revenue growth, although BPO could be impacted in the near term as
the company tries to restructure it. The Axon acquisition helps HCLT in filling up the
gap in Enterprise Services, where HCLT was lagging its peers. With ERP showing
signs of recovery, we expect Axon to start contributing to growth in the coming
quarters. We forecast ~26% revenue ($ terms) and ~30% EPS CAGRs in FY10-13.
Valuation
Our target price is Rs560 based on 18x Jun 12E EPS. This is higher than the midpoint
of the 5-20x band that the stock has traded in over the past three years. We
believe a higher multiple is justified given improving macro and potential benefits
arising out of the Axon acquisition. We believe PE remains the most appropriate
valuation measure given HCLT's profitable track record.
Risks
We rate HCLT shares Low Risk, which is in line with our quantitative risk-rating
system as the company has significant scale, enjoys a good brand name and
continues to generate significant FCF. Key downside risks that could impede the
stock from reaching our target price include: (1) any significant appreciation of the
rupee against the USD/EUR/GBP; (2) a sharp slowdown in the US/Global economy;
(3) acquisition-related risks; and (4) the strategy of pursuing large deals could have
negative margin implications.
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