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Excessive pessimism in
valuations; revenue surety
provides comfort
1QFY12: revenue growth of 5.4%, margin decline of 140bps expected
We expect HCL Tech to deliver US dollar revenue growth of 5.4% q-q in
1Q FY12F along with a 140bp decline in EBITDA margin from wage hikes
and fresher recruitment, cushioned by rupee depreciation. Management
commentary on the deal pipeline and win-rates will be keenly watched.
Action: Top pick in IT for highest absolute return potential
HCL Tech’s market share gain focus and lower margin expectations
should aid in competing better in a growth slowdown scenario, in our view.
We derive comfort from revenue surety on strong deal wins/pipeline
exhibited by: 1) USD2.7bn worth of TCV signed in BFSI/manufacturing in
FY11; 2) about USD2bn worth of deals in BFSI in the pipeline; and
3) anticipated strong deal decision making in the Dec-11 quarter with a
record-high pipeline. Valuations seem to be building in a worst-case
scenario of severe pricing cuts, which we believe is unlikely. In our view,
its valuations and best-in-class earnings growth provide comfort for
implied upside of ~30% from current levels. HCL Tech remains our top
pick in IT.
Catalyst: Decision making on deals in line with expectations in the
Dec-11 quarter and an absence of pricing cuts
Valuation: Reiterate Buy and TP of INR530 based on 15x FY13F
We expect a USD revenue CAGR of 19% and EPS CAGR of 24% over
FY11-13F. Our estimates are marginally revised upwards for rupee
depreciation. We retain our TP of INR530, based on 15x FY13F earnings.
Current valuations build in extreme pessimism; reiterate Buy
We believe a key risk which is being built into the current price is pricing cuts. HCL Tech,
on account of its lower margins, has the highest sensitivity to pricing cuts on earnings in
our coverage universe. We believe the stock is building in the possibility of a ~5% pricing
cut, which we consider unlikely due to the following:
• HCL Tech pricing is already lower than the peer group’s pricing by ~10%; and
• HCL Tech’s lower margin expectations; implying that in the case of pricing pressure,
the risks would be higher for peers.
Notwithstanding its high-beta nature and the possibility of a liquidity-related fall, we
reiterate HCL Tech as our top pick in the IT sector and maintain our Buy, with a TP of
INR530 on best-in-class EPS CAGR of ~24% over FY11-13F. Our TP is based on 15x
FY13F earnings, in line with its average historical valuation to reflect higher economic
uncertainty and increased risk perception
Valuation methodology
Our target price of INR530 is based on 15x our FY13F earnings forecast of INR35.5,
which is in line with its historical average valuation.
Risk to valuation
The key risks are: 1) worse-than-expected slowdown and breakage of pricing discipline;
2) failure to exhibit stability in margins; 3) rupee appreciation; and 4) client-specific
issues.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Excessive pessimism in
valuations; revenue surety
provides comfort
1QFY12: revenue growth of 5.4%, margin decline of 140bps expected
We expect HCL Tech to deliver US dollar revenue growth of 5.4% q-q in
1Q FY12F along with a 140bp decline in EBITDA margin from wage hikes
and fresher recruitment, cushioned by rupee depreciation. Management
commentary on the deal pipeline and win-rates will be keenly watched.
Action: Top pick in IT for highest absolute return potential
HCL Tech’s market share gain focus and lower margin expectations
should aid in competing better in a growth slowdown scenario, in our view.
We derive comfort from revenue surety on strong deal wins/pipeline
exhibited by: 1) USD2.7bn worth of TCV signed in BFSI/manufacturing in
FY11; 2) about USD2bn worth of deals in BFSI in the pipeline; and
3) anticipated strong deal decision making in the Dec-11 quarter with a
record-high pipeline. Valuations seem to be building in a worst-case
scenario of severe pricing cuts, which we believe is unlikely. In our view,
its valuations and best-in-class earnings growth provide comfort for
implied upside of ~30% from current levels. HCL Tech remains our top
pick in IT.
Catalyst: Decision making on deals in line with expectations in the
Dec-11 quarter and an absence of pricing cuts
Valuation: Reiterate Buy and TP of INR530 based on 15x FY13F
We expect a USD revenue CAGR of 19% and EPS CAGR of 24% over
FY11-13F. Our estimates are marginally revised upwards for rupee
depreciation. We retain our TP of INR530, based on 15x FY13F earnings.
Current valuations build in extreme pessimism; reiterate Buy
We believe a key risk which is being built into the current price is pricing cuts. HCL Tech,
on account of its lower margins, has the highest sensitivity to pricing cuts on earnings in
our coverage universe. We believe the stock is building in the possibility of a ~5% pricing
cut, which we consider unlikely due to the following:
• HCL Tech pricing is already lower than the peer group’s pricing by ~10%; and
• HCL Tech’s lower margin expectations; implying that in the case of pricing pressure,
the risks would be higher for peers.
Notwithstanding its high-beta nature and the possibility of a liquidity-related fall, we
reiterate HCL Tech as our top pick in the IT sector and maintain our Buy, with a TP of
INR530 on best-in-class EPS CAGR of ~24% over FY11-13F. Our TP is based on 15x
FY13F earnings, in line with its average historical valuation to reflect higher economic
uncertainty and increased risk perception
Valuation methodology
Our target price of INR530 is based on 15x our FY13F earnings forecast of INR35.5,
which is in line with its historical average valuation.
Risk to valuation
The key risks are: 1) worse-than-expected slowdown and breakage of pricing discipline;
2) failure to exhibit stability in margins; 3) rupee appreciation; and 4) client-specific
issues.
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