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We hosted an investor roadshow of HCL Tech. Key take aways are: 1) HCL Tech expects to
grow at the higher end of peer group beyond FY11E, thanks to diversified portfolio, strengths in
key niche services and continued investments; 2) FY12E margins to be in a narrow band due to
continued investments.
Key highlights of meeting with Heads of Delivery&Ops (ex-BFSI) and Infra Scvs
Clients are demanding optimisation of run-the-business (RTB) spend through higher
productivity, spend/vendor consolidation and increased outsourcing/offshoring. HCLT
believes that with tight IT budgets, savings on RTB spend will likely be invested in changethe-
business (CTB) spend . HCLT has been increasing its wallet share with clients, given its
strong positioning in CTB (including Product engineering services, Enterprise Solutions and
Applications Development) and RTB (including IMS and support/maintenance) and higher
flexibility of managing large deals.
Geographically, HCL Tech is witnessing higher traction on discretionary spend/transformation
deals from US, annuity based traditional outsourcing deals from Europe and higher growth
across outsourcing and transformation deals from rest of the world.
In terms of verticals, HCLT believes that BFSI, Healthcare, Media, Manufacturing will continue
to drive higher growth. It is witnessing signs of recovery in telecom, but expects performance
to be muted in near-medium term. In BFSI, HCLT's diversified geographical focus beyond US
is driving growth. Despite higher offshoring penetration, Media and Entertainment segment is
seeing growth driven by increasing discretionary spend. Growth in Healthcare is driven by
new regulations (especially in US) and operational consolidation.
Renewal of large deals is likely to keep the pipeline of HCLT robust over medium term. With
differentiated positioning in infrastructure services and enterprise solutions (through Axon),
HCLT has been successful in cross selling application services. This has led to higher wallet
share in existing/new clients as well as first time outsourcers for deals involving not only best
of the breed outsourcing but also multi services or total outsourcing.
Investments to continue
HCLT believes that despite building scale and wallet share in RTB/CTB projects, it will need
to continue investing in new services offerings/technologies to maintain deal win momentum.
HCLT believes that traditional IT vendors need to create capabilities across emerging
technologies including a) mobility, b) cloud computing/services oriented architecture, c)
Enterprise 3.O (transition from batch processing and web based processing to real time
processing), and d) integrated customer experience (including social networking, business
analytics, e-commerce etc) to address changing IT needs of clients. Therefore it believes that
despite creating inroads and building scale in last 3 years through niche positioning, it will
have to continue making investments beyond FY11E to drive balanced growth across
services, verticals and geographies.
Key investor focus - Margin movement in FY12 - likely to move in narrow band
Most investor queries centred on margin movement beyond FY11E. HCLT management was
non-committal on FY12 margin expectations with more clarity to be given during 4Q11 results.
The management believes that despite winning wallet share and achieving scale in the
business over the last couple of years, its diversified business portfolio across services,
verticals and geographies will require continued investment beyond FY11.
Higher scale of competitors in one/two chosen vertical/services is leading to higher operating
leverage versus HCLT which is looking to build scale across many services/verticals.
Therefore management believes that the strategy to continue diversification will lead to higher
investment in sales and marketing, building IP/Solutions/tools beyond FY11.
Besides the above, HCLT's increasing wins in multi-services deals will likely translate into
higher investment in knowledge transfer, which would keep the upside in operating leverage
limited.
On pricing, HCLT does not expect any improvement other than COLA (cost of living
adjustment) or through change in services mix. It believes that most clients are now
demanding fixed price projects or output based pricing. It believes that the realisation in such
deals would be driven higher through internal productivity versus any like-to-like rate
increases.
HCLT will be announcing wage hikes for FY12 during 4Q11 results and expects margins in
1Q12 to decline materially versus 4Q11 (which is likely to witness margin improvement of
100bp qoq excluding currency impact). It expects similar trend of margin movement in FY12
versus FY11 with qoq improvement in margin post 1Q12. Considering higher dependence of
HCL Tech on lateral employees and continued demand momentum while entering FY12,
wage inflation at HCL Tech is likely to be at least at the higher end of the industry peers
(FY11 wage inflation had impacted margins by 300bp qoq in 1Q11).
We have built into 30bps improvement in FY12 EBITDA margin versus consensus build up of
60-100bps improvement. Despite more clarity to emerge regarding FY12 margins in 4Q11
results announcement, we expect margins to move in a narrow band in FY12 versus FY11.
We do agree that continued investment in business despite achieving scale should result in
continued higher growth in revenues for HCLT versus peers going forward. HCLT remains
confident to drive an outperforming organic revenue growth versus most peers beyond FY11.
Current FY12 tax rate guidance of 24% (versus 22%) is likely to be fine tuned during 4Q11
results with completion of the budgeting cycle for FY12.
Overall we believe that continued investment in business beyond FY11 will keep the revenue
growth of HCLT at the higher end of the peer group in FY12 despite likely lower margins than
consensus expectation.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
We hosted an investor roadshow of HCL Tech. Key take aways are: 1) HCL Tech expects to
grow at the higher end of peer group beyond FY11E, thanks to diversified portfolio, strengths in
key niche services and continued investments; 2) FY12E margins to be in a narrow band due to
continued investments.
Key highlights of meeting with Heads of Delivery&Ops (ex-BFSI) and Infra Scvs
Clients are demanding optimisation of run-the-business (RTB) spend through higher
productivity, spend/vendor consolidation and increased outsourcing/offshoring. HCLT
believes that with tight IT budgets, savings on RTB spend will likely be invested in changethe-
business (CTB) spend . HCLT has been increasing its wallet share with clients, given its
strong positioning in CTB (including Product engineering services, Enterprise Solutions and
Applications Development) and RTB (including IMS and support/maintenance) and higher
flexibility of managing large deals.
Geographically, HCL Tech is witnessing higher traction on discretionary spend/transformation
deals from US, annuity based traditional outsourcing deals from Europe and higher growth
across outsourcing and transformation deals from rest of the world.
In terms of verticals, HCLT believes that BFSI, Healthcare, Media, Manufacturing will continue
to drive higher growth. It is witnessing signs of recovery in telecom, but expects performance
to be muted in near-medium term. In BFSI, HCLT's diversified geographical focus beyond US
is driving growth. Despite higher offshoring penetration, Media and Entertainment segment is
seeing growth driven by increasing discretionary spend. Growth in Healthcare is driven by
new regulations (especially in US) and operational consolidation.
Renewal of large deals is likely to keep the pipeline of HCLT robust over medium term. With
differentiated positioning in infrastructure services and enterprise solutions (through Axon),
HCLT has been successful in cross selling application services. This has led to higher wallet
share in existing/new clients as well as first time outsourcers for deals involving not only best
of the breed outsourcing but also multi services or total outsourcing.
Investments to continue
HCLT believes that despite building scale and wallet share in RTB/CTB projects, it will need
to continue investing in new services offerings/technologies to maintain deal win momentum.
HCLT believes that traditional IT vendors need to create capabilities across emerging
technologies including a) mobility, b) cloud computing/services oriented architecture, c)
Enterprise 3.O (transition from batch processing and web based processing to real time
processing), and d) integrated customer experience (including social networking, business
analytics, e-commerce etc) to address changing IT needs of clients. Therefore it believes that
despite creating inroads and building scale in last 3 years through niche positioning, it will
have to continue making investments beyond FY11E to drive balanced growth across
services, verticals and geographies.
Key investor focus - Margin movement in FY12 - likely to move in narrow band
Most investor queries centred on margin movement beyond FY11E. HCLT management was
non-committal on FY12 margin expectations with more clarity to be given during 4Q11 results.
The management believes that despite winning wallet share and achieving scale in the
business over the last couple of years, its diversified business portfolio across services,
verticals and geographies will require continued investment beyond FY11.
Higher scale of competitors in one/two chosen vertical/services is leading to higher operating
leverage versus HCLT which is looking to build scale across many services/verticals.
Therefore management believes that the strategy to continue diversification will lead to higher
investment in sales and marketing, building IP/Solutions/tools beyond FY11.
Besides the above, HCLT's increasing wins in multi-services deals will likely translate into
higher investment in knowledge transfer, which would keep the upside in operating leverage
limited.
On pricing, HCLT does not expect any improvement other than COLA (cost of living
adjustment) or through change in services mix. It believes that most clients are now
demanding fixed price projects or output based pricing. It believes that the realisation in such
deals would be driven higher through internal productivity versus any like-to-like rate
increases.
HCLT will be announcing wage hikes for FY12 during 4Q11 results and expects margins in
1Q12 to decline materially versus 4Q11 (which is likely to witness margin improvement of
100bp qoq excluding currency impact). It expects similar trend of margin movement in FY12
versus FY11 with qoq improvement in margin post 1Q12. Considering higher dependence of
HCL Tech on lateral employees and continued demand momentum while entering FY12,
wage inflation at HCL Tech is likely to be at least at the higher end of the industry peers
(FY11 wage inflation had impacted margins by 300bp qoq in 1Q11).
We have built into 30bps improvement in FY12 EBITDA margin versus consensus build up of
60-100bps improvement. Despite more clarity to emerge regarding FY12 margins in 4Q11
results announcement, we expect margins to move in a narrow band in FY12 versus FY11.
We do agree that continued investment in business despite achieving scale should result in
continued higher growth in revenues for HCLT versus peers going forward. HCLT remains
confident to drive an outperforming organic revenue growth versus most peers beyond FY11.
Current FY12 tax rate guidance of 24% (versus 22%) is likely to be fine tuned during 4Q11
results with completion of the budgeting cycle for FY12.
Overall we believe that continued investment in business beyond FY11 will keep the revenue
growth of HCLT at the higher end of the peer group in FY12 despite likely lower margins than
consensus expectation.
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