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HCL Technologies (HCLT)
Technology
It’s revenue growth or profitability. HCLT’s 1QFY12 revenue performance was lower
than our estimate. The HCLT story revolves around better-than-peers revenue growth
driven by margin sacrifice; this thesis has failed to pass the muster, for the first time in
many quarters. HCLT results reinforced our view that aggressive deal pursuit has led to
an undesirable either/or situation of revenue growth and profitability. We cut our
FY2012/13E revenue growth estimates by 2-3% but raise our EPS estimates by 5-6% to
factor in lower Re assumptions. SELL. TP revised up to Rs400/share (from Rs375 earlier).
Weak 1QFY12 quarter; FCF burn of US$20 mn even though it may be a quarterly aberration
HCLT’s reported 1QFY12 performance was lower than our estimate. The company reported
revenues of US$1,002 mn, a qoq growth of 4.1%, lower than our estimate of 5.3% growth.
EBITDA margin (after stock compensation charge) declined 130 bps qoq to 16.7%; our
expectation was 16.8%. Net income of Rs5.1 bn was 6% below our estimate. FCF generation was
weak, impacted by decline in current liabilities and sharp increase in unbilled revenues.
Revenues exceed headcount growth once again though it fails to fire up margins
HCLT’s revenue CQGR of 6% over the past eight quarters is significantly ahead of headcount
CQGR of 5%. This has led to increase in per capita revenue productivity by 10% to ~US$51,000/
person though this has not translated into corresponding increase in per capita EBITDA/EBIT or
margins. This could possibly be on account of deal wins (1) with high onsite infra components and
(2) involving high degree of employee rebadging. HCLT’s 1QFY12 EBITDA margin declined 130
bps qoq to 16.7%; compensation increase for 80% of wage bill impacted margin by 200 bps. This
was offset by Rupee depreciation which benefitted margin by 100 bps+.
Muted EAS performance raises questions on performance of acquired entities
HCLT’s enterprise application services segment declined qoq. Revenue growth from EAS has been
muted for the past several quarters indicating little (visible) synergy benefits from the Axon
acquisition. We also highlight that HCLT had also made two BPO acquisitions, viz. Liberata and
Capital Stream. Benefits of these acquisitions have not reflected in BPO performance, either.
Street estimates may be optimistic. SELL
We reduce our below-consensus FY2012/13E revenue growth estimate to 20.6/13.9%. Below
EBTIDA line adjustments and lower Re assumption lead to 5.6/4.5% increase in EPS though it is
still well below consensus. We are not as optimistic as the Street on financial performance. We
maintain our SELL rating on the stock with a revised target price of Rs400/share. Our target price
implies P/E multiple of 11.7X, a 35% discount to TCS and Infosys.
Weak cash generation
HCLT reported free cash burn of US$20 mn in 1QFY12. Operating cash generation was
US$26 mn, ~15% of EBITDA (post option expenses). This was on account of an increase of
7 in receivables days (including unbilled revenues) and decline in current liabilities. On the
positive side and to HCLT’s credit, its working capital cycle is lower than some of the larger
peers.
Details on 1QFY12 performance
Exhibit 1 depicts HCLT’s 1QFY12 results versus our estimates. We note that we have
translated the company’s US$ P&L into Re at a Re/US$ rate of 48.8, the same as assumed in
our forecasts. The company has stopped publishing convenience translation Rupee financials
using end-period rate and has started publishing only translated Rupee financials using
average rate for the quarter. We have moved our forecasts to average rate assumptions as
well. Key highlights from 1QFY12
Revenues at US$1,002 mn (+4.1% qoq, +24.7% yoy) came in around 1% lower than our
estimate. Revenue growth was led by applications and infra segments; BPO revenues
declined sequentially. Constant currency revenue growth was 5.1% qoq.
EBITDA margin declined 130 bps qoq to 16.7%, broadly in line with our estimate. The
company has effected wage hikes for a bulk of its employees. December 2011 quarter
will see an incremental margin impact of around 50 bps qoq on account of the balance.
HCLT added around 3,500 employees at the consolidated level, similar to the net
headcount addition in the previous quarter. The company indicated that 50%+ of its
gross hires during the quarter were freshers.
Growth was led by Retail/CPG (+12% qoq) and Manufacturing (+8%) verticals. Among
service lines, growth was driven by product engineering and infra segments.
End-September 2011 hedges outstanding stood at US$713 mn, up from US$392 mn at
end-June 2011. These include US$180 mn of balance sheet hedges.
HCLT announced a special ‘milestone’ dividend of Rs2/share in addition to an interim
dividend of Rs2/share.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
HCL Technologies (HCLT)
Technology
It’s revenue growth or profitability. HCLT’s 1QFY12 revenue performance was lower
than our estimate. The HCLT story revolves around better-than-peers revenue growth
driven by margin sacrifice; this thesis has failed to pass the muster, for the first time in
many quarters. HCLT results reinforced our view that aggressive deal pursuit has led to
an undesirable either/or situation of revenue growth and profitability. We cut our
FY2012/13E revenue growth estimates by 2-3% but raise our EPS estimates by 5-6% to
factor in lower Re assumptions. SELL. TP revised up to Rs400/share (from Rs375 earlier).
Weak 1QFY12 quarter; FCF burn of US$20 mn even though it may be a quarterly aberration
HCLT’s reported 1QFY12 performance was lower than our estimate. The company reported
revenues of US$1,002 mn, a qoq growth of 4.1%, lower than our estimate of 5.3% growth.
EBITDA margin (after stock compensation charge) declined 130 bps qoq to 16.7%; our
expectation was 16.8%. Net income of Rs5.1 bn was 6% below our estimate. FCF generation was
weak, impacted by decline in current liabilities and sharp increase in unbilled revenues.
Revenues exceed headcount growth once again though it fails to fire up margins
HCLT’s revenue CQGR of 6% over the past eight quarters is significantly ahead of headcount
CQGR of 5%. This has led to increase in per capita revenue productivity by 10% to ~US$51,000/
person though this has not translated into corresponding increase in per capita EBITDA/EBIT or
margins. This could possibly be on account of deal wins (1) with high onsite infra components and
(2) involving high degree of employee rebadging. HCLT’s 1QFY12 EBITDA margin declined 130
bps qoq to 16.7%; compensation increase for 80% of wage bill impacted margin by 200 bps. This
was offset by Rupee depreciation which benefitted margin by 100 bps+.
Muted EAS performance raises questions on performance of acquired entities
HCLT’s enterprise application services segment declined qoq. Revenue growth from EAS has been
muted for the past several quarters indicating little (visible) synergy benefits from the Axon
acquisition. We also highlight that HCLT had also made two BPO acquisitions, viz. Liberata and
Capital Stream. Benefits of these acquisitions have not reflected in BPO performance, either.
Street estimates may be optimistic. SELL
We reduce our below-consensus FY2012/13E revenue growth estimate to 20.6/13.9%. Below
EBTIDA line adjustments and lower Re assumption lead to 5.6/4.5% increase in EPS though it is
still well below consensus. We are not as optimistic as the Street on financial performance. We
maintain our SELL rating on the stock with a revised target price of Rs400/share. Our target price
implies P/E multiple of 11.7X, a 35% discount to TCS and Infosys.
Weak cash generation
HCLT reported free cash burn of US$20 mn in 1QFY12. Operating cash generation was
US$26 mn, ~15% of EBITDA (post option expenses). This was on account of an increase of
7 in receivables days (including unbilled revenues) and decline in current liabilities. On the
positive side and to HCLT’s credit, its working capital cycle is lower than some of the larger
peers.
Details on 1QFY12 performance
Exhibit 1 depicts HCLT’s 1QFY12 results versus our estimates. We note that we have
translated the company’s US$ P&L into Re at a Re/US$ rate of 48.8, the same as assumed in
our forecasts. The company has stopped publishing convenience translation Rupee financials
using end-period rate and has started publishing only translated Rupee financials using
average rate for the quarter. We have moved our forecasts to average rate assumptions as
well. Key highlights from 1QFY12
Revenues at US$1,002 mn (+4.1% qoq, +24.7% yoy) came in around 1% lower than our
estimate. Revenue growth was led by applications and infra segments; BPO revenues
declined sequentially. Constant currency revenue growth was 5.1% qoq.
EBITDA margin declined 130 bps qoq to 16.7%, broadly in line with our estimate. The
company has effected wage hikes for a bulk of its employees. December 2011 quarter
will see an incremental margin impact of around 50 bps qoq on account of the balance.
HCLT added around 3,500 employees at the consolidated level, similar to the net
headcount addition in the previous quarter. The company indicated that 50%+ of its
gross hires during the quarter were freshers.
Growth was led by Retail/CPG (+12% qoq) and Manufacturing (+8%) verticals. Among
service lines, growth was driven by product engineering and infra segments.
End-September 2011 hedges outstanding stood at US$713 mn, up from US$392 mn at
end-June 2011. These include US$180 mn of balance sheet hedges.
HCLT announced a special ‘milestone’ dividend of Rs2/share in addition to an interim
dividend of Rs2/share.
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