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HCL Tech 1Q12 performance was lower on revenues with 5.1% qoq constant currency growth
(RBS 6%). However EBIT margins decline was restricted to just 112bp despite wage inflation.
Sharp correction post the pre-result rally offers favourable risk-reward ratio in our view.
Sharp correction offers favourable risk-reward
Sharp correction post pre-1Q12 result rally offers favourable risk reward in our view at current
valuations. HCLT has a strong track record in winning and executing large deals. We expect it
to win increasing share of large deal renewals towards the close of the year, helping it
generate new business and counter any near term demand weakness.
HCL Tech expects to continue outperforming the revenue growth rates estimated by
NASSCOM (which is 16-18% for FY12).
Even on margins, we believe that HCL Tech is better positioned to defend margins due to a)
increasing fresher hiring, b) offshoring potential in software services, c) turnaround in BPO
and d) improving leverage on SG&A with a quarterly revenue scale of more than US$1bn.
Revenue performance lower than expected
HCL Tech's 4.1% qoq growth in USD revenues was lower than our expectation of 5.1%.
Cross currency movements impacted revenue growth negatively by 1% qoq. Lower growth
was largely due to lower than expected growth in IMS (grew 4.5% qoq).
However, notably growth within key markets of US and Europe was higher at 5.3% qoq in
reported currency with constant currency growth of as high as 6.8% qoq in US. This clearly
indicates that overall growth rates were tepid largely due to qoq decline of 1.3% (growth of
0.7% in constant currency) in rest of the world (contributing 17.5% of revenues)
Software services registered 4.5% qoq growth with volume growth of 4%. Realisation
improved 0.5% qoq with higher onsite efforts. This increase was despite cross currency
headwind of 100bp indicating decent pricing increase in constant currency.
Growth within enterprise solutions has remained muted with 0.6% decline in constant
currency. The management indicated some softness in decision making relating to change
the business spend has lead to muted growth.
Improving margin management; EBITDA in incremental business yoy at 20.3%
Despite headwinds of 200bp through wage inflation and 45bp through higher recruitment of
freshers and resulting decline in utilisation (for offshore including trainees) rates by 280bp,
EBIT margins declined by just 112bp qoq given tailwinds of 102bp from currency and balance
through operational efficiencies.
Notably the incremental revenues in 1Q12 over 1Q11 has generated EBITDA margins of as
high as 20.3% versus company reported EBITDA margins of 17.1% 1QFY12, indicating
improving profitability on revenue scale up for HCL Tech. We believe that this fact has been
ignored by the market and we would like to observe this trend going forward.
HCL Tech reported recurring PAT (after ESOP charges and based on average INR
translation) at Rs4796mn, qoq decline of 5%. We estimated PAT of Rs5328mn based on the
end of quarter INR translation, which if we convert to translation at average INR rate, it comes
to RsRs4981mn worth of PAT. From 1Q12 onwards HCL Tech has stopped giving translation
based on end of quarter INR rates.
Tax rate has gone up to 25.8% versus 25% qoq. Despite lower treasury qoq, other income
(net of interest) gone up qoq to $5.1mn versus $1.6mn qoq.
Management expects record deal signing during 2Q12
HCL Tech re-iterated its expectations of record deal signing during 2Q12 despite increased
macro headwinds qoq.
During 1Q12 HCL Tech won 12 transformational deals versus 20 won during 4Q12.
According to management, outsourcing consultant TPI is expecting US$8bn worth deals due
for renewals in 4QCY11 versus US$5bn in 3QCY11 and US$7.2bn in 1HCY11.
HCL Tech expects to win significant share of deals out for renewals.
Muted cash flows
Despite improved performance on cash flow during FY11, HCL Tech's cash flow from
operations was much lower at US$25.8mn in 1Q12 versus US$380mn in FY11 lead by
increased receivable days at 74 versus 71 days qoq. This has increased largely due to higher
unbilled revenues.
However, we believe that cash flows needs to be judged on yearly basis rather than on
quarterly basis alone. On LTM basis, operating cash flows improved to $396mn at end of
Sept'11 versus $356mn at end of Sept'10.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
HCL Tech 1Q12 performance was lower on revenues with 5.1% qoq constant currency growth
(RBS 6%). However EBIT margins decline was restricted to just 112bp despite wage inflation.
Sharp correction post the pre-result rally offers favourable risk-reward ratio in our view.
Sharp correction offers favourable risk-reward
Sharp correction post pre-1Q12 result rally offers favourable risk reward in our view at current
valuations. HCLT has a strong track record in winning and executing large deals. We expect it
to win increasing share of large deal renewals towards the close of the year, helping it
generate new business and counter any near term demand weakness.
HCL Tech expects to continue outperforming the revenue growth rates estimated by
NASSCOM (which is 16-18% for FY12).
Even on margins, we believe that HCL Tech is better positioned to defend margins due to a)
increasing fresher hiring, b) offshoring potential in software services, c) turnaround in BPO
and d) improving leverage on SG&A with a quarterly revenue scale of more than US$1bn.
Revenue performance lower than expected
HCL Tech's 4.1% qoq growth in USD revenues was lower than our expectation of 5.1%.
Cross currency movements impacted revenue growth negatively by 1% qoq. Lower growth
was largely due to lower than expected growth in IMS (grew 4.5% qoq).
However, notably growth within key markets of US and Europe was higher at 5.3% qoq in
reported currency with constant currency growth of as high as 6.8% qoq in US. This clearly
indicates that overall growth rates were tepid largely due to qoq decline of 1.3% (growth of
0.7% in constant currency) in rest of the world (contributing 17.5% of revenues)
Software services registered 4.5% qoq growth with volume growth of 4%. Realisation
improved 0.5% qoq with higher onsite efforts. This increase was despite cross currency
headwind of 100bp indicating decent pricing increase in constant currency.
Growth within enterprise solutions has remained muted with 0.6% decline in constant
currency. The management indicated some softness in decision making relating to change
the business spend has lead to muted growth.
Improving margin management; EBITDA in incremental business yoy at 20.3%
Despite headwinds of 200bp through wage inflation and 45bp through higher recruitment of
freshers and resulting decline in utilisation (for offshore including trainees) rates by 280bp,
EBIT margins declined by just 112bp qoq given tailwinds of 102bp from currency and balance
through operational efficiencies.
Notably the incremental revenues in 1Q12 over 1Q11 has generated EBITDA margins of as
high as 20.3% versus company reported EBITDA margins of 17.1% 1QFY12, indicating
improving profitability on revenue scale up for HCL Tech. We believe that this fact has been
ignored by the market and we would like to observe this trend going forward.
HCL Tech reported recurring PAT (after ESOP charges and based on average INR
translation) at Rs4796mn, qoq decline of 5%. We estimated PAT of Rs5328mn based on the
end of quarter INR translation, which if we convert to translation at average INR rate, it comes
to RsRs4981mn worth of PAT. From 1Q12 onwards HCL Tech has stopped giving translation
based on end of quarter INR rates.
Tax rate has gone up to 25.8% versus 25% qoq. Despite lower treasury qoq, other income
(net of interest) gone up qoq to $5.1mn versus $1.6mn qoq.
Management expects record deal signing during 2Q12
HCL Tech re-iterated its expectations of record deal signing during 2Q12 despite increased
macro headwinds qoq.
During 1Q12 HCL Tech won 12 transformational deals versus 20 won during 4Q12.
According to management, outsourcing consultant TPI is expecting US$8bn worth deals due
for renewals in 4QCY11 versus US$5bn in 3QCY11 and US$7.2bn in 1HCY11.
HCL Tech expects to win significant share of deals out for renewals.
Muted cash flows
Despite improved performance on cash flow during FY11, HCL Tech's cash flow from
operations was much lower at US$25.8mn in 1Q12 versus US$380mn in FY11 lead by
increased receivable days at 74 versus 71 days qoq. This has increased largely due to higher
unbilled revenues.
However, we believe that cash flows needs to be judged on yearly basis rather than on
quarterly basis alone. On LTM basis, operating cash flows improved to $396mn at end of
Sept'11 versus $356mn at end of Sept'10.
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