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HCLT reported a mixed quarter but we think that the stock reaction is overdone.
HCLT’s revenue growth of 4.1% Q/Q (constant currency growth of 5.1% Q/Q)
came in line with our expectations though below consensus’. On the bright side,
we felt that margin (EBIT) performance was satisfactory, marginally ahead of
our expectations. On the negative side, enterprise application services (EAS)
business has shown tepid growth for the second straight quarter.
We believe that HCLT is more finely calibrating the balance between
revenue growth and margins than before. As a result, it is possible that
revenue growth in subsequent quarters may not match the pace seen in its past
as a result of better margin focus.
HCLT’s revenue growth trajectory may not show the smooth pattern seen
at larger peers such as TCS/Infosys. This is because HCLT depends more on
new large deals to drive its revenue growth while peers have a far more
pronounced client farming/mining-based model. However, the deal wins in this
quarter have been robust, and the Sep-Dec 11 quarter is likely to be a big one
for the industry for large deal sign-ups. Depending on these deals to a greater
extent than peers lends a skew to HCLT’s Q/Q revenue growth.
SG&A picks up. One of our concerns that we have had on HCLT is its ability
to maintain/improve gross margins, because only comfortable gross margins
can fund HCLT’s SG&A pick-up. Gross margins in this quarter fared better
than expectations but we need to watch this metric going forward.
Enterprise Application Services revenues declined 0.6% (in constant
currency terms (CC)), which is concerning in our view. It suggests that
AXON is struggling to sustain growth in line with/above company average.
We have analyzed the AXON acquisition in detail in our report “Trouble if you
do, trouble if you don't - this is largely the story of "big" acquisitions in Indian
IT” dated Oct 5, 2011. Infrastructure Services’ revenue growth remained
healthy at 5.8% Q/Q (CC)), while Custom Applications’ revenues grew 7.3%
(CC) sequentially. BPO revenues declined about 1.3% sequentially in constant
currency terms. This segment is still in the throes of business model change.
Maintain OW on reasonable valuations. Revenue trajectory should improve
with a lag due to deal wins. However, investors are likely to want to await the
first signal of revenue upturn given sober revenue growth over the past 2 qtrs.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
HCLT reported a mixed quarter but we think that the stock reaction is overdone.
HCLT’s revenue growth of 4.1% Q/Q (constant currency growth of 5.1% Q/Q)
came in line with our expectations though below consensus’. On the bright side,
we felt that margin (EBIT) performance was satisfactory, marginally ahead of
our expectations. On the negative side, enterprise application services (EAS)
business has shown tepid growth for the second straight quarter.
We believe that HCLT is more finely calibrating the balance between
revenue growth and margins than before. As a result, it is possible that
revenue growth in subsequent quarters may not match the pace seen in its past
as a result of better margin focus.
HCLT’s revenue growth trajectory may not show the smooth pattern seen
at larger peers such as TCS/Infosys. This is because HCLT depends more on
new large deals to drive its revenue growth while peers have a far more
pronounced client farming/mining-based model. However, the deal wins in this
quarter have been robust, and the Sep-Dec 11 quarter is likely to be a big one
for the industry for large deal sign-ups. Depending on these deals to a greater
extent than peers lends a skew to HCLT’s Q/Q revenue growth.
SG&A picks up. One of our concerns that we have had on HCLT is its ability
to maintain/improve gross margins, because only comfortable gross margins
can fund HCLT’s SG&A pick-up. Gross margins in this quarter fared better
than expectations but we need to watch this metric going forward.
Enterprise Application Services revenues declined 0.6% (in constant
currency terms (CC)), which is concerning in our view. It suggests that
AXON is struggling to sustain growth in line with/above company average.
We have analyzed the AXON acquisition in detail in our report “Trouble if you
do, trouble if you don't - this is largely the story of "big" acquisitions in Indian
IT” dated Oct 5, 2011. Infrastructure Services’ revenue growth remained
healthy at 5.8% Q/Q (CC)), while Custom Applications’ revenues grew 7.3%
(CC) sequentially. BPO revenues declined about 1.3% sequentially in constant
currency terms. This segment is still in the throes of business model change.
Maintain OW on reasonable valuations. Revenue trajectory should improve
with a lag due to deal wins. However, investors are likely to want to await the
first signal of revenue upturn given sober revenue growth over the past 2 qtrs.
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