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HCLT's 3Q11 results exceeded our expectations on the top line and margins. We expect revenue
momentum to continue and believe margin turnaround should continue into 4Q11. We continue to
like HCLT for its niche positioning, reflected in many non-RFP-driven deal wins in 3Q11. We
reiterate Buy
A superlative performance on all counts
HCLT’s strong qoq revenue growth and margin performance stand out, particularly following
Infosys’s subdued results. We see near-term cues for growth momentum to be sustained – the
big segments – IT and Infrastructure Services – continue to grow at a healthy clip. We also see
HCLT’s niche positioning as a differentiator for growth; many of the large deals that it won were
non-RFP driven. Management’s reaffirmation of its target to reach an EBIT margin of 15.3% by
4Q11 (adjusted for currency), matching 4Q10’s level, as well as improving cash conversion,
provide comfort on HCLT improving its execution. While FY12 margin headwinds are evident
(salary hikes and currency), we see operating leverage from growth, realisation improvement
(COLA-related hikes and service mix) and a mid-year potential turnaround in BPO as mitigating
factors.
3Q11 revenue and deal trends paint a healthy picture
3Q11 revenue of US$915m was up 5.8% qoq (up 4.8% in constant currency) vs an RBS forecast
of US$901m. Growth was strong for Infrastructure (+8.6% qoq) and IT (+5.4%) services. BPO
revenue was up 0.6%, despite a 4.8% inorganic drag. Perhaps the only notable skew was modest
0.7% qoq growth in the US, as clients focussed on smaller transformational projects, while RoW
grew 20.5% (in constant currency), partly aided by MNCs expanding into emerging markets.
Another highlight was 11 deal wins during 3Q11 (following 17 deals won in 2Q11) across
verticals, service lines and geographies.
Margin improvement was broad-based; management guides further scale-up in 4Q11
EBITDA margin was up 99bp qoq to 17.3% (RBS forecast: 17.0%). Margins improved across
service lines, driven by SG&A (45bp), utilisation/realisation (+48bp) and currency (+36bp). Other
income was up at Rs15m (-Rs79m in 2Q11), driving PAT (post ESOP charges) up by 16.1% qoq
to Rs4.39bn (RBS forecast: Rs4.11bn) Management guided for further improvement in margins in
4Q11, driven by higher utilisation and SG&A leverage. Management said FY12 margins could be
flat, but it awaits further clarity following the annual budgeting exercise.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
HCLT's 3Q11 results exceeded our expectations on the top line and margins. We expect revenue
momentum to continue and believe margin turnaround should continue into 4Q11. We continue to
like HCLT for its niche positioning, reflected in many non-RFP-driven deal wins in 3Q11. We
reiterate Buy
A superlative performance on all counts
HCLT’s strong qoq revenue growth and margin performance stand out, particularly following
Infosys’s subdued results. We see near-term cues for growth momentum to be sustained – the
big segments – IT and Infrastructure Services – continue to grow at a healthy clip. We also see
HCLT’s niche positioning as a differentiator for growth; many of the large deals that it won were
non-RFP driven. Management’s reaffirmation of its target to reach an EBIT margin of 15.3% by
4Q11 (adjusted for currency), matching 4Q10’s level, as well as improving cash conversion,
provide comfort on HCLT improving its execution. While FY12 margin headwinds are evident
(salary hikes and currency), we see operating leverage from growth, realisation improvement
(COLA-related hikes and service mix) and a mid-year potential turnaround in BPO as mitigating
factors.
3Q11 revenue and deal trends paint a healthy picture
3Q11 revenue of US$915m was up 5.8% qoq (up 4.8% in constant currency) vs an RBS forecast
of US$901m. Growth was strong for Infrastructure (+8.6% qoq) and IT (+5.4%) services. BPO
revenue was up 0.6%, despite a 4.8% inorganic drag. Perhaps the only notable skew was modest
0.7% qoq growth in the US, as clients focussed on smaller transformational projects, while RoW
grew 20.5% (in constant currency), partly aided by MNCs expanding into emerging markets.
Another highlight was 11 deal wins during 3Q11 (following 17 deals won in 2Q11) across
verticals, service lines and geographies.
Margin improvement was broad-based; management guides further scale-up in 4Q11
EBITDA margin was up 99bp qoq to 17.3% (RBS forecast: 17.0%). Margins improved across
service lines, driven by SG&A (45bp), utilisation/realisation (+48bp) and currency (+36bp). Other
income was up at Rs15m (-Rs79m in 2Q11), driving PAT (post ESOP charges) up by 16.1% qoq
to Rs4.39bn (RBS forecast: Rs4.11bn) Management guided for further improvement in margins in
4Q11, driven by higher utilisation and SG&A leverage. Management said FY12 margins could be
flat, but it awaits further clarity following the annual budgeting exercise.
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