HCL Technologies:: Expect industry-leading growth to continue :Motilal Oswal

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Expect industry-leading growth to continue
Earnings visibility high; Buy
 Has consistently outperformed peers on revenue growth on the back of
market share gains through large deal wins.
 Deal pipeline remains strong, led by vendor consolidation across Europe
and US.
 Least cut in FY13 estimates due to visibility on growth and margin levers.
 Buy with a target price of INR525 - 31% upside.


Expect industry-leading growth on market share gains to continue
HCL Tech closed large deals with a TCV (total contract value) of USD1b in CY08,
USD1.5b in CY09 and USD2.65b in CY10. Moreover, our channel checks suggest
that HCL Tech continues to be a part of large deals and RFPs that are likely to fructify
over the next two quarters. HCL Tech is pursuing a deal pipeline of USD2b in BFSI
alone. We believe the spread of deals being pursued is also wide across BFSI, consumer
& retail, and manufacturing. HCL Tech's ability to increase market share was clearly
visible even in FY10 (a weak year), with the company adding incremental revenues of
USD336m organically (ex-Axon) v/s USD138m, USD62m and USD313m for Infosys,
Wipro and TCS, respectively (the highest among its peer set).



Limited headwinds due to a lighter hedge book unlike in the past
HCL Tech had a hedge book of USD2.7b in FY09, spread over 24 months, which led
to an impact on PBT of 15%, 24% and 4% in FY09, FY10 and FY11, respectively.
The company is now relatively less hedged, with hedges of USD390m covering 2-3
months of net inflows or 20% of its net inflows for the next 12 months. This puts HCL
Tech in a much better position than in the past. We expect EPS growth to be in line
with revenue growth in FY12 and FY13.


We model in flat margins for FY12 and FY13
HCL Tech's levers for margin improvement include:
 Broadening the pyramid: HCL Tech has reduced the proportion of lateral hires
from 80% of gross hires in FY10 to 70% in FY11 (still compares to 37% and 42% for
Infosys and TCS respectively in FY11). We expect this trend to continue over the
next few years, thereby driving margin benefits from a broadening pyramid.
 BPO business turning profitable: HCL Tech began an overhaul of its BPO business
in FY09, with the acquisition of Liberata and Control Point to create a platform-based
BPO that is non-linear and less dependent on voice-based revenues. The BPO should
turn profitable by 3QFY12 and should report its first full year of profitability in FY13
v/s an EBIT loss of USD4.5m and USD21m in FY10 and FY11 respectively. This
should add ~50bp to margins in FY13.


Least cut in estimates due to high growth visibility, margin levers
While we have cut our revenue estimate for HCL Tech by 2% in FY13, our FY12
assumptions and margin assumptions for FY13 are largely unchanged. We believe that in
line with its commentary, the company will be able to report flattish margins YoY in FY12,
and go on to sustain the same in FY13, aided by levers from pyramid, BPO and ramp-up
in large deals.


Valuations compelling; maintain Buy
HCL Tech's valuations at 11.5x FY13E EPS of INR35 are compelling. The company does
not face the headwinds from a huge hedge portfolio or declining margins in FY12 and
FY13. Moreover, it is likely to deliver industry-leading revenue and EPS growth in FY12
and FY13. Hence, HCL Tech is unlikely to see the trough valuations of 6-7x one-year
forward earnings seen in 2008. Buy with a target price of INR525 - 31% upside.