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HCL Technologies — Increased confidence in
revenue outlook
Estimate Change
Robust rev outlook + Stable margins = 30% earnings growth
Channel checks and management meetings boost confidence in our 26% FY11-
13 USD revenue growth forecast for HCLT. Management remains focused on
investing in growing market share and holding rather than improving margins at
this stage. Hence, to be prudent, we cut our margin & FY12/13 EPS estimates by
2% and 6%, still implying industry-leading 30% earnings growth over FY11-13.
However, given our now conservative margin estimates, we raise our target PE to
16x 1-yr forward (FY13) vs 15x earlier and retain our PO of Rs620, for 34%
potential stock upside. Strong 4Q results & commentary should be a catalyst.
Well poised to deliver industry leading rev growth
We forecast industry leading revenue growth on 1) Its leadership in IT infra
management services (IMS), which form 22% of revs where we forecast 35% rev
growth in FY12 higher than our 26% overall growth 2) BPO revenues, ~6% of rev
forecast to grow 10% vs a decline in FY11 as it turns around and 3) Should
benefit from upturn in discretionary spends like R&D services (e.g. new deal from
Xerox) & enterprise solutions, together 38% of revs, given strong position therein.
Margins have bottomed; Upside risk to estimates
Given management’s strategy to invest in winning and growing marquee clients,
we now assume flattish EBITDA margins in our model. However, we see upside
risk from a) breakeven in the BPO business from Mar12 quarter b) employee
pyramid broadening by recruiting fresh engineers vs. the 75-80% lateral
recruitment today and c) improvement of margins in enterprise application as the
business scales and proportion of offshore revenue grows.
Attractively valued
HCLT trades at 16xFY12E PE and 12xFY13E PE. Our PO at 16x FY13E PE is at
the lower end of its 1-yr fwd PE band of 16-19x. Stock also looks attractive on
EV/EBITDA (FY11e) to 2-yr fwd EBITDA growth of 0.58x, in line with 5yr avg.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
HCL Technologies — Increased confidence in
revenue outlook
Estimate Change
Robust rev outlook + Stable margins = 30% earnings growth
Channel checks and management meetings boost confidence in our 26% FY11-
13 USD revenue growth forecast for HCLT. Management remains focused on
investing in growing market share and holding rather than improving margins at
this stage. Hence, to be prudent, we cut our margin & FY12/13 EPS estimates by
2% and 6%, still implying industry-leading 30% earnings growth over FY11-13.
However, given our now conservative margin estimates, we raise our target PE to
16x 1-yr forward (FY13) vs 15x earlier and retain our PO of Rs620, for 34%
potential stock upside. Strong 4Q results & commentary should be a catalyst.
Well poised to deliver industry leading rev growth
We forecast industry leading revenue growth on 1) Its leadership in IT infra
management services (IMS), which form 22% of revs where we forecast 35% rev
growth in FY12 higher than our 26% overall growth 2) BPO revenues, ~6% of rev
forecast to grow 10% vs a decline in FY11 as it turns around and 3) Should
benefit from upturn in discretionary spends like R&D services (e.g. new deal from
Xerox) & enterprise solutions, together 38% of revs, given strong position therein.
Margins have bottomed; Upside risk to estimates
Given management’s strategy to invest in winning and growing marquee clients,
we now assume flattish EBITDA margins in our model. However, we see upside
risk from a) breakeven in the BPO business from Mar12 quarter b) employee
pyramid broadening by recruiting fresh engineers vs. the 75-80% lateral
recruitment today and c) improvement of margins in enterprise application as the
business scales and proportion of offshore revenue grows.
Attractively valued
HCLT trades at 16xFY12E PE and 12xFY13E PE. Our PO at 16x FY13E PE is at
the lower end of its 1-yr fwd PE band of 16-19x. Stock also looks attractive on
EV/EBITDA (FY11e) to 2-yr fwd EBITDA growth of 0.58x, in line with 5yr avg.
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