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HCL Tech looks better positioned than in the 2008/9 downturn with diversified
services, traction in large deals, low margin downside and improving cash flows.
Given increased macro headwinds we trim our FY12/13F US dollar top line 5%/7%
and EPS by 5%/8%, but find valuations attractive on our revised forecasts. Buy
Much better positioned than in the previous downturn
HCLT looks better placed than in the 2008/9 downturn: a) large deals and inorganic activity
over the past three years have grown its revenue base (up 90% over FY08-11) and HCLT
has gained traction in new verticals; b) a defensive infrastructure services practice (now 25%
of revenues vs 16% in September 2008) is generating non-cyclical annuity business; c)
HCLT has higher traction than its peers in non-traditional verticals; and d) the Axon
acquisition has helped expand its client base and build a credible Enterprise Application
business. HCLT has a strong track record in winning and executing large deals. We expect it
to win an increasing share of large deal renewals towards the close of the year, helping it
generate new business and counter any near-term demand weakness.
We expect margins to hold up in the medium to long term
HCLT’s EBIDTA margin contracted 463bp over FY09-11 (more than its peers’) as, we
believe, aggressive growth was in part achieved by upfront investment in large deals and the
integration of acquisitions while its BPO business was going into restructuring mode.
Conversely, we now see HCLT as ideally positioned to defend margins due to: a) high SG&A
leverage (14.8% of sales); b) increasing fresher hiring, which can help contain wage inflation;
c) increased offshoring of software services to India, particularly on Enterprise Apps; and d) a
turnaround in BPO, where losses have been contained.
After the recent sharp correction, valuations look reasonable on our revised forecasts
We lower our FY12/13F US dollar revenues by 5%/7% and EPS by 5%/8%, building in slower
demand over 2HFY12. We lower our target P/E multiple to 15x (from 16x) 12-month EPS
ending March 2013, in line with our lower 18x target multiple for our sector benchmark Infosys
(keeping the EV/EBITDA-based discount to Infosys largely unchanged at around 20%),
which reduces our target price to Rs490 (from Rs590). At current valuations, HCLT trades
slightly below -1x standard deviation on P/E, representing an attractive entry level, in our
view. We reiterate our Buy rating.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
HCL Tech looks better positioned than in the 2008/9 downturn with diversified
services, traction in large deals, low margin downside and improving cash flows.
Given increased macro headwinds we trim our FY12/13F US dollar top line 5%/7%
and EPS by 5%/8%, but find valuations attractive on our revised forecasts. Buy
Much better positioned than in the previous downturn
HCLT looks better placed than in the 2008/9 downturn: a) large deals and inorganic activity
over the past three years have grown its revenue base (up 90% over FY08-11) and HCLT
has gained traction in new verticals; b) a defensive infrastructure services practice (now 25%
of revenues vs 16% in September 2008) is generating non-cyclical annuity business; c)
HCLT has higher traction than its peers in non-traditional verticals; and d) the Axon
acquisition has helped expand its client base and build a credible Enterprise Application
business. HCLT has a strong track record in winning and executing large deals. We expect it
to win an increasing share of large deal renewals towards the close of the year, helping it
generate new business and counter any near-term demand weakness.
We expect margins to hold up in the medium to long term
HCLT’s EBIDTA margin contracted 463bp over FY09-11 (more than its peers’) as, we
believe, aggressive growth was in part achieved by upfront investment in large deals and the
integration of acquisitions while its BPO business was going into restructuring mode.
Conversely, we now see HCLT as ideally positioned to defend margins due to: a) high SG&A
leverage (14.8% of sales); b) increasing fresher hiring, which can help contain wage inflation;
c) increased offshoring of software services to India, particularly on Enterprise Apps; and d) a
turnaround in BPO, where losses have been contained.
After the recent sharp correction, valuations look reasonable on our revised forecasts
We lower our FY12/13F US dollar revenues by 5%/7% and EPS by 5%/8%, building in slower
demand over 2HFY12. We lower our target P/E multiple to 15x (from 16x) 12-month EPS
ending March 2013, in line with our lower 18x target multiple for our sector benchmark Infosys
(keeping the EV/EBITDA-based discount to Infosys largely unchanged at around 20%),
which reduces our target price to Rs490 (from Rs590). At current valuations, HCLT trades
slightly below -1x standard deviation on P/E, representing an attractive entry level, in our
view. We reiterate our Buy rating.
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