Mixed rev. growth but margins surprise again; HOLD
HCLT reported in-line US$ revenues (+3% QoQ) but a positive margin surprise
(+140bps QoQ). Infrastructure services continued to drive growth (+8.6% QoQ)
while Software services was sluggish (+0.6% QoQ). Software volume growth of
1.4% QoQ was below peers (Infy/TCS). We raise FY14 earnings estimates by
11% to factor in better margins and INR depreciation. While HCLT’s earnings
performance remains ahead of expectations, further re-rating hinges on more
broad-based growth and recovery in Software Services. Maintain HOLD.
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HCLT reported in-line US$ revenues (+3% QoQ) but a positive margin surprise
(+140bps QoQ). Infrastructure services continued to drive growth (+8.6% QoQ)
while Software services was sluggish (+0.6% QoQ). Software volume growth of
1.4% QoQ was below peers (Infy/TCS). We raise FY14 earnings estimates by
11% to factor in better margins and INR depreciation. While HCLT’s earnings
performance remains ahead of expectations, further re-rating hinges on more
broad-based growth and recovery in Software Services. Maintain HOLD.
Q4 - Margin-led performance:HCLT reported in-line revenues of US$1.23bn, up
3.1% QoQ,though EBIT margins were ahead at 20.9%, up 140bps (RCMLe 20%).
Growth was driven by Infrastructure services (up 8.6% QoQ), while Software
services/BPO grew by 0.6%/3% QoQ. Margins were aided by INR depreciation and
operational efficiencies as previously signed deals stabilize. Net profit (adj. for ESOP
expense) came in at Rs 12bn, up 40% YoY and 8% ahead of expectations due to
higher margins and other income.
Software services weak, headcount decline continues: Software services volumes
grew by 1.4% QoQ as Onsite volumes were flat QoQ and Offshore volumes grew 2%.
Software headcount declined by 405 to 51,990 employees and utilisation (incl.
trainees) rose to 80.6% from 79% in Q3. Enterprise App revenues declined by 3% QoQ
CC, while Engg. services and Custom Application services grew 4.4%/2.6%.
BFSI/Manufacturing grew by 5.8%/4.7% QoQ CC.
Valuations and View: We maintain our US$ revenue growth estimates(14%
FY13-15 CAGR), but higher margin assumptions and INR depreciation drive an 11%
upgrade to FY14 EPS estimates. The stock trades at 14.6x FY14E P/E, a discount of
15% to Infosys. We raise our March’14 target price to Rs 1,000 (Rs 800 earlier) but
maintain HOLD. WhileHCLT has delivered a good earnings performance, recovery in
software services growth is essential for a further re-rating.
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