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HCL Technologies (HCLT.BO)
Buy: Gaining Scale and Share
Weak macro scenario — HCLT expects a tough macro outlook in 2012 with
most clients facing revenue/cost pressures. While “Run The Business” remains
strong, the company is not seeing much requirement for consulting kind of work.
While fresh spends are less, HCL expects higher market share in rebid deals to
contribute to the industry growth. Management mentioned that the Top 5
companies in India (incl CTSH) account for ~45% share in incremental deals.
Other macro trends — (1) New ERP license revenues back to pre-recessionary
levels but there is a change in mix with the distribution more focused on front-end
– BI and CRM have an adverse multiplier effect (~1:4) as traditional ERP (~ 1:7).
(2) There are ~$207b worth re-bid deals in the next 5 years – highest in BFSI
(19%) and Manufacturing (28%). (3) RTB work to pay for CTB in a scenario
where budgets are flat - ADM will lose relevance as cloud and SaaS increase in
importance. Indian vendors are highly reliant on ADM with discrete services deals
forming 93% of signings by top 3 Indian companies over 2006-11 - compared to
74% for HCL and 73% for top 3 MNC companies.
Targeting EBIT margin of ~14% — Adjusted for currency movements, HCL is
targeting margins of ~14%. This is lower than competitors in India because the
business model is more similar to MNCs in the kinds of contracts signed.
Management believes that they have margin levers available such as employee
pyramid (3.6 years average experience in HCL vs 2.2 for industry).
Areas of investments — (1) Engineering Services is 18% of revenues – this
provides HCLT an advantage with mobility, Big Data, etc. (2) To focus on Asset
light Infrastructure work (3) Does not see a critical competency requirement that
would necessitate an acquisition in the current environment
Other takeaways — (1) Seeing rising visa rejections impacting business –
management believes HCL is more favorably placed by virtue of being more
onsite heavy than other companies – especially with the Axon acquisition. HCL
also takes customer resources on-board for ITO deals and has rebadged a lot of
people into own workforce over last few years. (2) Believes non-linearity to be a
while away with outcome based work increasing over time and kicking in post full
integration between services/platforms/BPO etc.
Maintain Buy — Strong deal wins, good client mining and critical scale should
result in HCLT continuing to grow faster than market. We expect EBITDA margins
to remain stable at 17-18% going forward. This should result in industry leading
earnings growth - the stock trades at ~13x FY13E - maintain Buy.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
HCL Technologies (HCLT.BO)
Buy: Gaining Scale and Share
Weak macro scenario — HCLT expects a tough macro outlook in 2012 with
most clients facing revenue/cost pressures. While “Run The Business” remains
strong, the company is not seeing much requirement for consulting kind of work.
While fresh spends are less, HCL expects higher market share in rebid deals to
contribute to the industry growth. Management mentioned that the Top 5
companies in India (incl CTSH) account for ~45% share in incremental deals.
Other macro trends — (1) New ERP license revenues back to pre-recessionary
levels but there is a change in mix with the distribution more focused on front-end
– BI and CRM have an adverse multiplier effect (~1:4) as traditional ERP (~ 1:7).
(2) There are ~$207b worth re-bid deals in the next 5 years – highest in BFSI
(19%) and Manufacturing (28%). (3) RTB work to pay for CTB in a scenario
where budgets are flat - ADM will lose relevance as cloud and SaaS increase in
importance. Indian vendors are highly reliant on ADM with discrete services deals
forming 93% of signings by top 3 Indian companies over 2006-11 - compared to
74% for HCL and 73% for top 3 MNC companies.
Targeting EBIT margin of ~14% — Adjusted for currency movements, HCL is
targeting margins of ~14%. This is lower than competitors in India because the
business model is more similar to MNCs in the kinds of contracts signed.
Management believes that they have margin levers available such as employee
pyramid (3.6 years average experience in HCL vs 2.2 for industry).
Areas of investments — (1) Engineering Services is 18% of revenues – this
provides HCLT an advantage with mobility, Big Data, etc. (2) To focus on Asset
light Infrastructure work (3) Does not see a critical competency requirement that
would necessitate an acquisition in the current environment
Other takeaways — (1) Seeing rising visa rejections impacting business –
management believes HCL is more favorably placed by virtue of being more
onsite heavy than other companies – especially with the Axon acquisition. HCL
also takes customer resources on-board for ITO deals and has rebadged a lot of
people into own workforce over last few years. (2) Believes non-linearity to be a
while away with outcome based work increasing over time and kicking in post full
integration between services/platforms/BPO etc.
Maintain Buy — Strong deal wins, good client mining and critical scale should
result in HCLT continuing to grow faster than market. We expect EBITDA margins
to remain stable at 17-18% going forward. This should result in industry leading
earnings growth - the stock trades at ~13x FY13E - maintain Buy.
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