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3QFY11 results
5.8%QQ $-revenue growth (4.8% in constant currency) was strong and
at the top end of peer comparables, thus far this quarter. Tailwinds from
large deal ramp-ups, especially in infrastructure services and applications
aided the top-line performance, even as BPO remains a problem area.
100bpsQQ increase in EBITDA margins was in-line with management
guidance and driven by utilisation improvement and SG&A leverage. In
our view, disconnect between street’s FY12 margin expectations (+70-
100bpsYY) and reality (which could be closer to flattish YY) remains the
key hindrance to stock performance ahead. Underperform stays.
Solid revenue performance driven by infrastructure services
8.5%QQ $-revenue growth in infrastructure services was the key driver of a
solid topline (+5.8%QQ) performance by HCLT in Mar-11 even as growth in
ERP (+6.3%QQ) and custom applications (+6.5%QQ) provided useful
boosters. HCL indicated significant increase in market share in Continental
Europe where it has replaced existing global tech companies as part of vendor
restructuring exercise. Increase in discretionary projects, especially in US and
positive trends in APAC make HCL confident of continued strength in the ERP
business. BPO (flattish QQ) remains impacted and we believe a phase of
restructuring and re-focus is likely to continue through 2011. While HCL has
signed 3 large deals in the BPO space, ramp-down in existing business implies
sustainable growth is unlikely to be seen before Mar-12 quarter.
Elevated margin expectations for FY12 is a source of worry
Ebitda margins for Mar-11 were up 100bpsQQ to 17.3%. Benefits from
utilisation improvement and SG&A leverage flowed through at the operating
profit level. Margin performance is in-line with management commitment of a
200bps improvement through Mar-11 and Jun-11 quarters. However, this
improvement is already built into street estimates. In our view, the wage hike
cycle starting 1QFY12 will likely derail this margin progress. With a muted
pricing environment across the industry and HCL’s greater reliance on lateral
hiring (c.f. freshers at peers), we believe that street’s expectation of a 70-
100bpsYY improvement in margins in FY12 will likely hit a wall of worry. In
our view, HCL’s margin is settling in at a structurally lower level and unlikely
to return to previous year’s level anytime soon.
Improvement in cash flow generation needs to sustain
HCL's revenue growth has led industry peers over the last few quarters but
the latest quarter offered what was required for some convergence in
valuations with peers: growth with margin improvement and good free cash
flow generation. A longer term constructive view on the stock depends on
continued consistency on margin/cash flow metrics. In the interim, our target
price of Rs490 (17.5xMar12) gives HCL some benefit of doubt on this front.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
3QFY11 results
5.8%QQ $-revenue growth (4.8% in constant currency) was strong and
at the top end of peer comparables, thus far this quarter. Tailwinds from
large deal ramp-ups, especially in infrastructure services and applications
aided the top-line performance, even as BPO remains a problem area.
100bpsQQ increase in EBITDA margins was in-line with management
guidance and driven by utilisation improvement and SG&A leverage. In
our view, disconnect between street’s FY12 margin expectations (+70-
100bpsYY) and reality (which could be closer to flattish YY) remains the
key hindrance to stock performance ahead. Underperform stays.
Solid revenue performance driven by infrastructure services
8.5%QQ $-revenue growth in infrastructure services was the key driver of a
solid topline (+5.8%QQ) performance by HCLT in Mar-11 even as growth in
ERP (+6.3%QQ) and custom applications (+6.5%QQ) provided useful
boosters. HCL indicated significant increase in market share in Continental
Europe where it has replaced existing global tech companies as part of vendor
restructuring exercise. Increase in discretionary projects, especially in US and
positive trends in APAC make HCL confident of continued strength in the ERP
business. BPO (flattish QQ) remains impacted and we believe a phase of
restructuring and re-focus is likely to continue through 2011. While HCL has
signed 3 large deals in the BPO space, ramp-down in existing business implies
sustainable growth is unlikely to be seen before Mar-12 quarter.
Elevated margin expectations for FY12 is a source of worry
Ebitda margins for Mar-11 were up 100bpsQQ to 17.3%. Benefits from
utilisation improvement and SG&A leverage flowed through at the operating
profit level. Margin performance is in-line with management commitment of a
200bps improvement through Mar-11 and Jun-11 quarters. However, this
improvement is already built into street estimates. In our view, the wage hike
cycle starting 1QFY12 will likely derail this margin progress. With a muted
pricing environment across the industry and HCL’s greater reliance on lateral
hiring (c.f. freshers at peers), we believe that street’s expectation of a 70-
100bpsYY improvement in margins in FY12 will likely hit a wall of worry. In
our view, HCL’s margin is settling in at a structurally lower level and unlikely
to return to previous year’s level anytime soon.
Improvement in cash flow generation needs to sustain
HCL's revenue growth has led industry peers over the last few quarters but
the latest quarter offered what was required for some convergence in
valuations with peers: growth with margin improvement and good free cash
flow generation. A longer term constructive view on the stock depends on
continued consistency on margin/cash flow metrics. In the interim, our target
price of Rs490 (17.5xMar12) gives HCL some benefit of doubt on this front.
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