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1QFY12 results review
US$ revenue growth missed expectations for 2nd consecutive quarter and
at 4.1%QQ came near mid end of peer comparables. With December a
seasonally weaker quarter, revenue growth hopes have been pushed out
to 2012, where macro-economic challenges could de-rail growth
prospects. 140bpsQQ Ebitda decline was in-line with expectations, with a
weaker currency providing some respite. HCLT stock’s resurgence
through 2010/11 (despite margin impairment) was driven by solid
revenue growth. However, its phase of above peer topline performance
has come to a close, impacting its relative valuation prospects. UPF stays.
Sep-11: Revenue growth was the key disappointment
4.1%QQ $-revenue growth (5.1% in constant currency) came at the mid-end
of top-tier peers. Volume growth of 4%QQ in the core software business was
backed by a surprising 0.5%QQ improvement in realisations. BPO business
remains troubled (down 2.5%QQ) and we believe inorganic moves are
imperative to drive growth ahead. Enterprise applications (contains Axon) has
now grown slower than the company for the 5th consecutive quarter, quite a
contrast to peers Infosys/TCS. Despite management’s assertion of strong
pipeline in the segment, we remain cautious on the prospects ahead. While
engineering services growth came in strong (+8.7%QQ), shutdowns in Dec
quarter could limit growth prospects in the near-term.
Currency support for margins in the near-term
EBIT margin decline of 140bpsQQ was in-line with company guidance.
Headwinds from wage hikes to junior/middle managers was somewhat
balanced by a better currency realisation. A weaker currency holds out good
prospects for margin performance in Dec-11 quarter despite salary increases
to senior management. Net profit of $107m was somewhat impacted by
$3.8m of forex losses. Operating cash flow generation was weak at $25.8m
c.f. EBIT of $143.1m in-line with HCL’s historical weak performance in 1Q.
Tracking sector averages on growth not good enough for the stock
HCLT needs to show much better than peers financial performance,
consistently, in order to sustain investor interest. BPO restructuring has been
now ongoing for almost 4 years, early promise of upside in ERP post the Axon
acquisition has not materialised and greater reliance on project-driven
business implies HCLT has to try much harder than peers on the revenue
front. We fear that after a good FY11, HCLT is now struggling to beat peer
comparables on growth. Importantly, the revenue growth was traded for
margins which have now settled at a structurally lower level, much below
peers even as revenue growth has mellowed. In this backdrop, arguments for
stock upsides based on cheaper than peer valuations do not hold ground.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
1QFY12 results review
US$ revenue growth missed expectations for 2nd consecutive quarter and
at 4.1%QQ came near mid end of peer comparables. With December a
seasonally weaker quarter, revenue growth hopes have been pushed out
to 2012, where macro-economic challenges could de-rail growth
prospects. 140bpsQQ Ebitda decline was in-line with expectations, with a
weaker currency providing some respite. HCLT stock’s resurgence
through 2010/11 (despite margin impairment) was driven by solid
revenue growth. However, its phase of above peer topline performance
has come to a close, impacting its relative valuation prospects. UPF stays.
Sep-11: Revenue growth was the key disappointment
4.1%QQ $-revenue growth (5.1% in constant currency) came at the mid-end
of top-tier peers. Volume growth of 4%QQ in the core software business was
backed by a surprising 0.5%QQ improvement in realisations. BPO business
remains troubled (down 2.5%QQ) and we believe inorganic moves are
imperative to drive growth ahead. Enterprise applications (contains Axon) has
now grown slower than the company for the 5th consecutive quarter, quite a
contrast to peers Infosys/TCS. Despite management’s assertion of strong
pipeline in the segment, we remain cautious on the prospects ahead. While
engineering services growth came in strong (+8.7%QQ), shutdowns in Dec
quarter could limit growth prospects in the near-term.
Currency support for margins in the near-term
EBIT margin decline of 140bpsQQ was in-line with company guidance.
Headwinds from wage hikes to junior/middle managers was somewhat
balanced by a better currency realisation. A weaker currency holds out good
prospects for margin performance in Dec-11 quarter despite salary increases
to senior management. Net profit of $107m was somewhat impacted by
$3.8m of forex losses. Operating cash flow generation was weak at $25.8m
c.f. EBIT of $143.1m in-line with HCL’s historical weak performance in 1Q.
Tracking sector averages on growth not good enough for the stock
HCLT needs to show much better than peers financial performance,
consistently, in order to sustain investor interest. BPO restructuring has been
now ongoing for almost 4 years, early promise of upside in ERP post the Axon
acquisition has not materialised and greater reliance on project-driven
business implies HCLT has to try much harder than peers on the revenue
front. We fear that after a good FY11, HCLT is now struggling to beat peer
comparables on growth. Importantly, the revenue growth was traded for
margins which have now settled at a structurally lower level, much below
peers even as revenue growth has mellowed. In this backdrop, arguments for
stock upsides based on cheaper than peer valuations do not hold ground.
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