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HCL’s Q1FY11 is largely in line. We maintain estimates and
target price. Key concern is the large margin fall driven by
the need to spend heavily on SGA. Also we see above
normal capex to get a foot hold in new businesses. Vineet
Nayyar - CEO – is of the view that US corporations are
buying on hope that things will turn around and current
investments will pay off. This we believe is a key risk to
demand in the future as mentioned in our recent Sector
Initiation report ‘Focus on the Macro and not the Micro’
dated 19 Oct.
Result largely in line: HCL reported a 9% sequential
topline growth in USD which was largely inline with our
expectations. Revenue growth was led by an 7.2% volume
growth and favourable currency movement of 1.6%.
Europe Strong but US showing weakness: Europe grew
by 19% and contributed ~50% of the incremental
revenues. US on the other hand grew by a modest 4%.
While Europe’s return to growth could be positive news
for Indian IT companies, a weak US could be early signs of
deteriorating macro environment.
Margins decline owing to wage hikes, SG&A: Wage
increases eroded gross margin by ~150bps. EBITDA
margins declined by ~240bps as SG&A increased by
~100bps. A higher tax rate of 20% meant that bottom line
declined by 1.6% sequentially.
Reiterate sell: We believe the macro scenario would
likely turn weak leading to lower than expected growth
for the IT services. September being the strongest
quarter, we would advice investors to move out of the
stock.
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