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HCL Technologies
Outlook
HCL Tech's improving growth expectations have been led by impressive deal wins. This
strategy will be tested again in a deteriorating macroeconomic environment. However,
given HCL Tech’s strong revenue growth performance during the last downturn, we
estimate the company to report 15% yoy (versus an estimated12% yoy for Infosys) USD
revenue growth in FY13. Our key concerns in the medium term continue to be a decline
in margins on account of wage hikes, higher reliance on lateral recruits and BPO
business losses. HCL Tech has the most comprehensive SAP practice, in our view, and
could thus be hardest hit if demand for software and services declines in CY12E. The
stock has outperformed the Sensex by 7% ytd. At 13x FY13E P/E, we believe it is fairly
valued. We reiterate our Hold rating on HCL Tech.
Valuation
We value Indian IT service firms on a P/E basis relative to their historical trading range
in relation to peers as well as growth rates. We value HCL Tech at 13x FY13E P/E. Our
target P/E multiple for HCL Tech is at about a 25% discount to Infosys' target P/E
multiple based on FY13E. The reduced discount to Infosys (vs. 35% in the past) is to
account for sector-leading growth in revenues reported by the company over the last
two years, its relatively higher exposure to key revenue drivers for the next two years,
namely Europe and exposure to spending in package implementation.
Risks
We identify four industry-level risks: (1) rupee appreciation, (2) a potential economic
slowdown in the US to which HCL Tech is more vulnerable than peers, (3) global vendor
competition and (4) increasing wage inflation with supply-side (employees) issues. For
HCLT, the key downside risk remains maintaining margins while executing its large
deals. The key upside risk is higher-than-expected volume growth due to the strong deal
pipeline from the deals won in FY09, creating a significant growth driver.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
HCL Technologies
Outlook
HCL Tech's improving growth expectations have been led by impressive deal wins. This
strategy will be tested again in a deteriorating macroeconomic environment. However,
given HCL Tech’s strong revenue growth performance during the last downturn, we
estimate the company to report 15% yoy (versus an estimated12% yoy for Infosys) USD
revenue growth in FY13. Our key concerns in the medium term continue to be a decline
in margins on account of wage hikes, higher reliance on lateral recruits and BPO
business losses. HCL Tech has the most comprehensive SAP practice, in our view, and
could thus be hardest hit if demand for software and services declines in CY12E. The
stock has outperformed the Sensex by 7% ytd. At 13x FY13E P/E, we believe it is fairly
valued. We reiterate our Hold rating on HCL Tech.
Valuation
We value Indian IT service firms on a P/E basis relative to their historical trading range
in relation to peers as well as growth rates. We value HCL Tech at 13x FY13E P/E. Our
target P/E multiple for HCL Tech is at about a 25% discount to Infosys' target P/E
multiple based on FY13E. The reduced discount to Infosys (vs. 35% in the past) is to
account for sector-leading growth in revenues reported by the company over the last
two years, its relatively higher exposure to key revenue drivers for the next two years,
namely Europe and exposure to spending in package implementation.
Risks
We identify four industry-level risks: (1) rupee appreciation, (2) a potential economic
slowdown in the US to which HCL Tech is more vulnerable than peers, (3) global vendor
competition and (4) increasing wage inflation with supply-side (employees) issues. For
HCLT, the key downside risk remains maintaining margins while executing its large
deals. The key upside risk is higher-than-expected volume growth due to the strong deal
pipeline from the deals won in FY09, creating a significant growth driver.
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