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HCL Tech's 1Q12 performance was lower on revenues with 5.1% qoq constant currency growth
(RBS 6%). However, the decline in EBIT margins was restricted to just 112bp despite wage
inflation. A sharp correction post the pre-result rally offers a favourable risk-reward ratio, in our
view. Reiterate Buy
1Q12: lower on revenues and better on margins
HCLT reported 5.1% qoq constant currency (CC) growth in US dollar revenues (RBS: 6%).
Notably, growth within key markets of the US was higher at 6.8% in CC terms. Despite
headwinds of 200bp/45bp from wage inflation/lower utilisation, EBIT margins declined by only
112bp qoq, given tailwinds of 102bp from currency and balance through operational efficiencies.
HCLT has a strong track record in winning/executing large deals. We expect it to win an
increasing share of large deal renewals towards the close of CY11 and counter any near-term
demand weakness. HCLT also expects to continue outperforming revenue growth rates
estimated by NASSCOM at 16-18% for FY12. We upgrade our FY12/FY13 EPS estimates by
6%/2% largely driven from INR assumptions. A sharp correction post the pre-1Q12 result rally
offers favourable risk reward, in our view. We reiterate Buy.
Margin visibility improving
HCLT is well positioned to defend margins, in our view, due to: 1) increasing fresher hiring (added
6,446 freshers in 1H12; 2) increased offshoring potential of software services, particularly on
Enterprise Apps; 3) a turnaround in BPO (breakeven expected in 3Q12) and 4) improving
leverage on SG&A with quarterly revenues of US$1bn+. Notably, incremental revenues in 1Q12
over 1Q11 generated EBITDA margins of 20.3% vs reported margins of 17.1% in 1Q12,
indicating improving profitability with scale-up.
1Q12 PAT lower than expected; cash flow muted
With lower-than-expected revenues and higher-than-expected tax, reported PAT was lower at
Rs4.8bn. HCLT's operating cash flow (OCF) was lower at US$25.8m in 1Q12 (US$380m in
FY11) led by an increase in receivable days and translation hit through INR depreciation. We
believe cash flows need to be judged on a yearly basis rather than on a quarterly basis alone. On
an LTM basis, OCF improved to US$396m at end-Sept 2011 from US$356m at end-Sept 2010.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
HCL Tech's 1Q12 performance was lower on revenues with 5.1% qoq constant currency growth
(RBS 6%). However, the decline in EBIT margins was restricted to just 112bp despite wage
inflation. A sharp correction post the pre-result rally offers a favourable risk-reward ratio, in our
view. Reiterate Buy
1Q12: lower on revenues and better on margins
HCLT reported 5.1% qoq constant currency (CC) growth in US dollar revenues (RBS: 6%).
Notably, growth within key markets of the US was higher at 6.8% in CC terms. Despite
headwinds of 200bp/45bp from wage inflation/lower utilisation, EBIT margins declined by only
112bp qoq, given tailwinds of 102bp from currency and balance through operational efficiencies.
HCLT has a strong track record in winning/executing large deals. We expect it to win an
increasing share of large deal renewals towards the close of CY11 and counter any near-term
demand weakness. HCLT also expects to continue outperforming revenue growth rates
estimated by NASSCOM at 16-18% for FY12. We upgrade our FY12/FY13 EPS estimates by
6%/2% largely driven from INR assumptions. A sharp correction post the pre-1Q12 result rally
offers favourable risk reward, in our view. We reiterate Buy.
Margin visibility improving
HCLT is well positioned to defend margins, in our view, due to: 1) increasing fresher hiring (added
6,446 freshers in 1H12; 2) increased offshoring potential of software services, particularly on
Enterprise Apps; 3) a turnaround in BPO (breakeven expected in 3Q12) and 4) improving
leverage on SG&A with quarterly revenues of US$1bn+. Notably, incremental revenues in 1Q12
over 1Q11 generated EBITDA margins of 20.3% vs reported margins of 17.1% in 1Q12,
indicating improving profitability with scale-up.
1Q12 PAT lower than expected; cash flow muted
With lower-than-expected revenues and higher-than-expected tax, reported PAT was lower at
Rs4.8bn. HCLT's operating cash flow (OCF) was lower at US$25.8m in 1Q12 (US$380m in
FY11) led by an increase in receivable days and translation hit through INR depreciation. We
believe cash flows need to be judged on a yearly basis rather than on a quarterly basis alone. On
an LTM basis, OCF improved to US$396m at end-Sept 2011 from US$356m at end-Sept 2010.
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