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HCL Technologies Ltd. (HCLT.BO)
Buy Equity Research
Above expectations on better margins, volume growth modest; Buy
What surprised us
HCL Tech posted 1QFY12 revenues of Rs46.5bn (up 8.2% qoq, in line with
GSe) and net income of Rs4.97 bn (4.2% above GSe). EBIT margin at 14.3%
came in 80 bp/50 bp above GSe/Bloomberg consensus. While constant
currency revenue growth was at 5.1% qoq, lower-than-expected volume
growth of 4% was disappointing. Infra services (+8.6% qoq) remained
strong and has grown at 11% CQGR over the last 24 quarters, reaffirming
our thesis of IMO being a key driver of growth for HCL over FY11-FY14E.
Utilization (incl. trainees) eased to 69.7% (-280 bp qoq), well below highs of
76.4%, providing a significant margin lever. HCL added 3,836 employees
(5.5% of employee base), suggesting a strong pipeline ahead.
What to do with the stock
We maintain Buy (on Conv. List) on HCL and believe that stock correction
is a good entry point. (1) We see stable revenue growth (17% CAGR over
FY11-FY14E), driven by (a) large deal wins in the last two years (US$2bn+),
(b) strong deal pipeline over the next two quarters (US$8bn deals in
4QCY11 up for restructuring) and (c) a resilient IMS business (25% of FY11
sales). (2) HCL has enough levers (utilization lowest since 2QFY08, BPO
breaking even in 3QFY12, and currency benefits) to provide upside to our
margin assumption if mgmt decides to release it in future. (3) HCL is
trading at 11.3x on FY13E P/E, a 30% discount to its large cap peers
and 25% discount to its 8-yr historical average, despite offering 21% EPS
CAGR over FY11-FY14E. We fine-tune our FY12E-FY14E EPS to factor in
long-term INR/USD at Rs46, and 12-m Director's Cut-based TP to Rs510
(from Rs501), implying 27% upside. Risks: Significant INR appreciation.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
HCL Technologies Ltd. (HCLT.BO)
Buy Equity Research
Above expectations on better margins, volume growth modest; Buy
What surprised us
HCL Tech posted 1QFY12 revenues of Rs46.5bn (up 8.2% qoq, in line with
GSe) and net income of Rs4.97 bn (4.2% above GSe). EBIT margin at 14.3%
came in 80 bp/50 bp above GSe/Bloomberg consensus. While constant
currency revenue growth was at 5.1% qoq, lower-than-expected volume
growth of 4% was disappointing. Infra services (+8.6% qoq) remained
strong and has grown at 11% CQGR over the last 24 quarters, reaffirming
our thesis of IMO being a key driver of growth for HCL over FY11-FY14E.
Utilization (incl. trainees) eased to 69.7% (-280 bp qoq), well below highs of
76.4%, providing a significant margin lever. HCL added 3,836 employees
(5.5% of employee base), suggesting a strong pipeline ahead.
What to do with the stock
We maintain Buy (on Conv. List) on HCL and believe that stock correction
is a good entry point. (1) We see stable revenue growth (17% CAGR over
FY11-FY14E), driven by (a) large deal wins in the last two years (US$2bn+),
(b) strong deal pipeline over the next two quarters (US$8bn deals in
4QCY11 up for restructuring) and (c) a resilient IMS business (25% of FY11
sales). (2) HCL has enough levers (utilization lowest since 2QFY08, BPO
breaking even in 3QFY12, and currency benefits) to provide upside to our
margin assumption if mgmt decides to release it in future. (3) HCL is
trading at 11.3x on FY13E P/E, a 30% discount to its large cap peers
and 25% discount to its 8-yr historical average, despite offering 21% EPS
CAGR over FY11-FY14E. We fine-tune our FY12E-FY14E EPS to factor in
long-term INR/USD at Rs46, and 12-m Director's Cut-based TP to Rs510
(from Rs501), implying 27% upside. Risks: Significant INR appreciation.
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