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HCL Technologies
Slight 1Q rev miss does not
cloud strong growth outlook
1Q short of expectation; Deal wins in RTB pipeline key
In our preview, we had been wary of outlook in discretionary enterprise solutions
business but a 1% decline (constant currency) is worrying. However R&D services
& Custom Applications outperformed expectations growing at 8.6% & 7.3% qoq
ccy, restricting rev miss to ~1%. Infrastructure Management Services (IMS) grew
reasonably well but slightly slower than expected at 5.8% qoq in ccy terms. Flat
margin guidance ex currency held for the year. We raise FY12E EPS by 13% to
bake in INR depreciation and maintain FY13/FY14 EPSe. Stock may languish
next 2-3 months till outcome of large “Run-the-business” deal pipeline & trends in
enterprise solutions spend are known in Jan 2012. At 11xFY13E PE & 25% FY11-
14E EPS CAGR, retain Buy despite 8% YTD outperformance. Income rating goes
from 8 (Same/Lower) to 7 (Same/Higher) on our FY12 dividend est. Yest’s 9%
slide in stock on slight miss to est & weak tech sentiment (IBM) appears overdone
1Q rev trends: A mixed bag
1Q rev grew 5.1% qoq in ccy, in line with peers, but ~1% short of estimates. INR
rev grew 8.2% qoq, yoy. Rev miss was led mainly by enterprise solutions and
partly by IMS, which though reasonably strong reported its slowest growth in over
7 qtrs. However, we expect this to pick up. EBIT margins were up 140bps yoy but
declined 120bps qoq, in-line with expectation, with wage hike for junior/ mid-level,
investment in SG&A and fresher hiring offset by Rupee & realization increase.
Growth in RTB revs likely to outstrip weakness in CTB revs
Outsourcing advisor TPI estimates US$13bn of deals coming for rebid in H2CY11
(vs. 7bn in H1) which are likely to benefit HCLT givn its focus on total IT
outsourcing contracts. 65% of HCLT’s pipeline consists of Run-the-Business
deals, including deals in IMS, application management and interestingly R&D
outsourcing too (where HCLT is a leader). Increasing time to market pressures,
and need to cut cost is driving outsourcing of the R&D function. Consulting led
Enterprise Application Services (20% of revs) may pick up only in 4-6 months.
1Q rev disappoints; Deal wins key to
watch
In our preview, we had been wary of outlook in discretionary enterprise solutions
business but a 1%decline (constant currency) in this service is worrying. However
R&D services & Custom Applications outperformed expectations growing at 8.6%
& 7.3% qoq ccy, restricting rev miss to ~1%. Infrastructure Management Services
(IMS) grew reasonably well but slightly slower than expected at 5.8% qoq in ccy
terms.
Flat yoy margin guidance (ex currency) was held for the year. We raise FY12E
EPS by 13% to bake in Rs depreciation and maintain FY13/FY14 EPSe.
Stock may languish next 2-3 months till outcome of large “Run-the-business” deal
pipeline & trends in enterprise solutions spend are known in Jan 2012.
At 11xFY13E PE and 25% FY11-14E EPS CAGR, retain Buy despite a 8% YTD
outperformance. Yesterday’s 9% slide in stock on slight miss to estimates & weak
tech sentiment (IBM services) appears overdone
Deal outlook is healthy
Deal pipeline outlook remains strong for HCLT driven by increased participation in
re-bid contracts and total IT outsourcing deals. Nearly 65% of the company’s
current pipeline is accounted for by annuity deals. However, pick-up in deal
closures for transformational projects is expected only early next year.
Like peers TCS and Infy, company highlighted that no projects cancellations or
deferrals had been seen so far. It expects IT budgets for clients to stay flattish
for CY12. Financial services, manufacturing and energy verticals constitute larger
proportions of the current deal pipeline.
IT Infra mgmnt services still set for fast paced growth
Despite a relatively soft quarter in infrastructure management services, we
continue to expect HCLT to grow above company average levels in IMS, as it has
done in the last 3 years.
Mixed trends in discretionary service lines
Enterprise application services turned in a second weak quarter on account of
certain projects coming to an end in the quarter. We would watch for
company’s performance in this service line which is amongst the most
discretionary services in its portfolio. Company expects pipeline for enterprise
application services to improve only early next year.
Revenue growth for engineering and R&D services, another discretionary
service line, however remains strong driven by large deal closures like Xerox.
Demand trends appear attractive in this service line with company benefitting
from increased levels of outsourcing, especially from Europe, Japan and
manufacturing vertical.
Price objective basis & risk
HCL (XHCLF)
Our Price Objective of Rs500 is at 14x FY13 PE. Our target PE is at close to 10%
discount to that for Wipro and is lower than the average 5 yr PE of 16x. Given our
strong EPS growth forecast, we see potential upside to our target multiple.
Downside risks stem from macro led delays in discretionary IT spending, slower
than expected growth in top 5 accounts, higher than expected wage hike
pressures and Rupee appreciation.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
HCL Technologies
Slight 1Q rev miss does not
cloud strong growth outlook
1Q short of expectation; Deal wins in RTB pipeline key
In our preview, we had been wary of outlook in discretionary enterprise solutions
business but a 1% decline (constant currency) is worrying. However R&D services
& Custom Applications outperformed expectations growing at 8.6% & 7.3% qoq
ccy, restricting rev miss to ~1%. Infrastructure Management Services (IMS) grew
reasonably well but slightly slower than expected at 5.8% qoq in ccy terms. Flat
margin guidance ex currency held for the year. We raise FY12E EPS by 13% to
bake in INR depreciation and maintain FY13/FY14 EPSe. Stock may languish
next 2-3 months till outcome of large “Run-the-business” deal pipeline & trends in
enterprise solutions spend are known in Jan 2012. At 11xFY13E PE & 25% FY11-
14E EPS CAGR, retain Buy despite 8% YTD outperformance. Income rating goes
from 8 (Same/Lower) to 7 (Same/Higher) on our FY12 dividend est. Yest’s 9%
slide in stock on slight miss to est & weak tech sentiment (IBM) appears overdone
1Q rev trends: A mixed bag
1Q rev grew 5.1% qoq in ccy, in line with peers, but ~1% short of estimates. INR
rev grew 8.2% qoq, yoy. Rev miss was led mainly by enterprise solutions and
partly by IMS, which though reasonably strong reported its slowest growth in over
7 qtrs. However, we expect this to pick up. EBIT margins were up 140bps yoy but
declined 120bps qoq, in-line with expectation, with wage hike for junior/ mid-level,
investment in SG&A and fresher hiring offset by Rupee & realization increase.
Growth in RTB revs likely to outstrip weakness in CTB revs
Outsourcing advisor TPI estimates US$13bn of deals coming for rebid in H2CY11
(vs. 7bn in H1) which are likely to benefit HCLT givn its focus on total IT
outsourcing contracts. 65% of HCLT’s pipeline consists of Run-the-Business
deals, including deals in IMS, application management and interestingly R&D
outsourcing too (where HCLT is a leader). Increasing time to market pressures,
and need to cut cost is driving outsourcing of the R&D function. Consulting led
Enterprise Application Services (20% of revs) may pick up only in 4-6 months.
1Q rev disappoints; Deal wins key to
watch
In our preview, we had been wary of outlook in discretionary enterprise solutions
business but a 1%decline (constant currency) in this service is worrying. However
R&D services & Custom Applications outperformed expectations growing at 8.6%
& 7.3% qoq ccy, restricting rev miss to ~1%. Infrastructure Management Services
(IMS) grew reasonably well but slightly slower than expected at 5.8% qoq in ccy
terms.
Flat yoy margin guidance (ex currency) was held for the year. We raise FY12E
EPS by 13% to bake in Rs depreciation and maintain FY13/FY14 EPSe.
Stock may languish next 2-3 months till outcome of large “Run-the-business” deal
pipeline & trends in enterprise solutions spend are known in Jan 2012.
At 11xFY13E PE and 25% FY11-14E EPS CAGR, retain Buy despite a 8% YTD
outperformance. Yesterday’s 9% slide in stock on slight miss to estimates & weak
tech sentiment (IBM services) appears overdone
Deal outlook is healthy
Deal pipeline outlook remains strong for HCLT driven by increased participation in
re-bid contracts and total IT outsourcing deals. Nearly 65% of the company’s
current pipeline is accounted for by annuity deals. However, pick-up in deal
closures for transformational projects is expected only early next year.
Like peers TCS and Infy, company highlighted that no projects cancellations or
deferrals had been seen so far. It expects IT budgets for clients to stay flattish
for CY12. Financial services, manufacturing and energy verticals constitute larger
proportions of the current deal pipeline.
IT Infra mgmnt services still set for fast paced growth
Despite a relatively soft quarter in infrastructure management services, we
continue to expect HCLT to grow above company average levels in IMS, as it has
done in the last 3 years.
Mixed trends in discretionary service lines
Enterprise application services turned in a second weak quarter on account of
certain projects coming to an end in the quarter. We would watch for
company’s performance in this service line which is amongst the most
discretionary services in its portfolio. Company expects pipeline for enterprise
application services to improve only early next year.
Revenue growth for engineering and R&D services, another discretionary
service line, however remains strong driven by large deal closures like Xerox.
Demand trends appear attractive in this service line with company benefitting
from increased levels of outsourcing, especially from Europe, Japan and
manufacturing vertical.
Price objective basis & risk
HCL (XHCLF)
Our Price Objective of Rs500 is at 14x FY13 PE. Our target PE is at close to 10%
discount to that for Wipro and is lower than the average 5 yr PE of 16x. Given our
strong EPS growth forecast, we see potential upside to our target multiple.
Downside risks stem from macro led delays in discretionary IT spending, slower
than expected growth in top 5 accounts, higher than expected wage hike
pressures and Rupee appreciation.
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