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4QFY11 results
While 5.3%QQ $-revenue growth came in strong, it missed street
expectations; HCL’s first top-line miss in 9 quarters. Industry-leading
revenue growth has been the key to HCL Tech’s stock performance and
the Jun-11 miss will likely weigh on the stock near-term. Elsewhere, HCL
showed good operational progress with 100bpsQQ increase in EBIT
margins and solid cash flow generation, factors which have bothered us
in the past. The key challenge for HCL in FY12 remains driving industryleading
revenue growth without compromising on profitability further.
With street expectations for FY12 running high on both, revenues and
margins, we fear downside risks to earnings estimates limiting the
valuation gains HCL has shown through the last year. A weaker macro is
likely to be an incremental overhang. Underperform stays on the stock.
Good revenue growth but not good enough
5.3%QQ $-revenue growth (3.9% in constant currency) came at the mid-end
of top-tier peers. Infrastructure services (+10.5%QQ) was once again the
fulcrum of revenue growth for HCLT with useful boosters from cross-currency
moves. BPO business remains troubled (down 4.4%QQ) and we believe
inorganic moves are imperative to drive growth ahead. Enterprise applications
(contain Axon) has now grown slower than the company for the 4th
consecutive quarter, even as the management remains hopeful of better
prospects ahead. HCL’s quarterly growth was likely dragged by the lag effect
of Japan earthquake (was growth geography for HCL in 9MFY11), reflected in
the modest showing in Rest of the World (+0.7%QQ in constant currency)
Good operational progress but sustainability is the key
Ebit margin performance (+100bpsQQ) was in-line with management
commitment of a 100bps improvement in the Jun-11 quarter. That said, we
are a tad disappointed by HCL’s decision to book certain net acquisitionrelated
costs ($4.2m) in the other income line. The wage hike in Sep-11
quarter (we are building in 250bpsQQ decline) will derail the margin progress
HCL has seen through 2HFY11. More importantly, we remain worried of
street’s elevated expectations (50-70bpsYY increase) of FY12 margins. The
reality will likely be at best flattish in our view. While free cash flow for the
quarter was strong at US$127.3m (110% of net income), FY11 cash flow
came in below (51% of net income) and warrants improvement ahead.
See downside risks to earnings/valuations
Revenues and margins remains an either/or situation for HCL Tech and stock
upsides from current levels demands strength in both as street is already
building in strong revenue growth and margin improvement in FY12.
Industry-wide pricing power also remains suspect even as volume upside is
inflating salary costs. Moreover, with industry-wide demand confidence also
on hold, there seem multiple pressure points on street's FY12/13 estimates.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
4QFY11 results
While 5.3%QQ $-revenue growth came in strong, it missed street
expectations; HCL’s first top-line miss in 9 quarters. Industry-leading
revenue growth has been the key to HCL Tech’s stock performance and
the Jun-11 miss will likely weigh on the stock near-term. Elsewhere, HCL
showed good operational progress with 100bpsQQ increase in EBIT
margins and solid cash flow generation, factors which have bothered us
in the past. The key challenge for HCL in FY12 remains driving industryleading
revenue growth without compromising on profitability further.
With street expectations for FY12 running high on both, revenues and
margins, we fear downside risks to earnings estimates limiting the
valuation gains HCL has shown through the last year. A weaker macro is
likely to be an incremental overhang. Underperform stays on the stock.
Good revenue growth but not good enough
5.3%QQ $-revenue growth (3.9% in constant currency) came at the mid-end
of top-tier peers. Infrastructure services (+10.5%QQ) was once again the
fulcrum of revenue growth for HCLT with useful boosters from cross-currency
moves. BPO business remains troubled (down 4.4%QQ) and we believe
inorganic moves are imperative to drive growth ahead. Enterprise applications
(contain Axon) has now grown slower than the company for the 4th
consecutive quarter, even as the management remains hopeful of better
prospects ahead. HCL’s quarterly growth was likely dragged by the lag effect
of Japan earthquake (was growth geography for HCL in 9MFY11), reflected in
the modest showing in Rest of the World (+0.7%QQ in constant currency)
Good operational progress but sustainability is the key
Ebit margin performance (+100bpsQQ) was in-line with management
commitment of a 100bps improvement in the Jun-11 quarter. That said, we
are a tad disappointed by HCL’s decision to book certain net acquisitionrelated
costs ($4.2m) in the other income line. The wage hike in Sep-11
quarter (we are building in 250bpsQQ decline) will derail the margin progress
HCL has seen through 2HFY11. More importantly, we remain worried of
street’s elevated expectations (50-70bpsYY increase) of FY12 margins. The
reality will likely be at best flattish in our view. While free cash flow for the
quarter was strong at US$127.3m (110% of net income), FY11 cash flow
came in below (51% of net income) and warrants improvement ahead.
See downside risks to earnings/valuations
Revenues and margins remains an either/or situation for HCL Tech and stock
upsides from current levels demands strength in both as street is already
building in strong revenue growth and margin improvement in FY12.
Industry-wide pricing power also remains suspect even as volume upside is
inflating salary costs. Moreover, with industry-wide demand confidence also
on hold, there seem multiple pressure points on street's FY12/13 estimates.
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