CLSA HCL tech

Business as usual
Solid confidence on margin performance (ex-currency) was the key
positive takeaway from our interaction with HCL. Company margin
guidance of 18-19% for FY14 at Rs55/$ could well be beaten in our view.
Revenue growth should likely continue the trend seen in recent times –
strong infra services and modest growth elsewhere. Overhang from
immigration bill & a soft overall market sentiment implies stock re-rating
is unlikely but earnings should be good enough to support the stock.

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Business as usual on revenue front
HCL suggested that it’s business as usual on the demand front and there has
been no change in the environment compared to 3 months back. Deal
pipeline in infrastructure services segment remains strong and decisionmaking is progressing normally on such deals. In recent weeks, HCL is seeing
some integrated deals in the market – which involve transforming the client’s
entire IT-BPO infrastructure and then running it. In the past Accenture has
been a leader in such deals but Indian vendors are now getting a look-in in
some of these. While some clients have been talking about the impending
immigration bill, HCL has not seeing any instances of delays due to that. We
are estimating 15% growth in $-revenues in FY14.
Confidence on margin performance ex-currency benefits as well
On advice of external consultants, HCL had embarked on a cost-containment
program 18 months back. While a good chunk of that benefit has flown
through in margins (through utilisation improvement and facilities
consolidation), HCL suggested that there is some more steam left. Recordhigh utilisations (both onsite and offshore) do not worry HCL and the
company believes that those are unlikely to constrain future margin
performance. With almost 50% of headcount in US locals, HCL seems better
placed than most to tackle the adverse impact of the immigration bill if it
goes through. The recent INR depreciation is a positive (1% depreciation c.f.
US$ adds 25bps to margins) but HCL prefers to wait and watch before using
the current currency levels as input in its deal modelling.
Stock return could be driven by earnings upgrades/rollover
After a solid 2012 which saw significant earnings upgrade, HCL’s stock has
taken a breather in 2013 so far. Change in CEO earlier this year and
uncertainty around the immigration bill has weighed on stock performance
despite solid financials. We expect HCL’s good run on financials to continue
through 2013 as well which in-turn should allay market fears around
leadership change. Given the soft market sentiment, near-term stock return
will be led by earnings upgrades and roll-over as re-rating seems unlikely