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C h a n g e i n s t r a t e g y l e a d s t o d o w n g r a d e…
While persistent revenue growth through mining of existing customers
and market share gains is imperative, we believe sustainable operating
margin expansion was essential - in HCL Tech’ case - for PE multiple rerating. Noticeably, the central theme for HCL Tech’s FY12E/FY13E
revenue growth outperformance rests on the assumption that it gains
market share from incumbent vendors. Though HCL has been successful
at this in the past, we are circumspect as this could pressurise pricing for
renewed deals; eventually impacting operation margins and jeopardises
our central theme of riding operating margin expansion at HCL Tech.
Consequently, we are downgrading HCL Technology from BUY to HOLD.
ƒ Earnings summary
The Q4FY11 numbers were generally in line with our estimate.
Revenues grew 5.5% to | 4,304 crore vs. our | 4,220 crore estimate.
Reported EBITDA of | 794.1 crore on an 18.5% EBITDA margin was
also in line with our | 780.7 crore EBITDA and 18.5% margin
estimate. Net income was at | 511 crore vs. our | 512 crore estimate
ƒ Operating metric highlights
Banking, financial services & insurance, 26% of revenue, grew at
only 2% QoQ in constant currency (CC) vs. 10.5% in Q3FY11.
Energy-utilities & manufacturing had robust growth of 18.7% and
7.6% QoQ, respectively, led by continued demand. Telecom
continues to be weak with 8.3% QoQ decline vs. 0.3% QoQ decline
in Q3. HCL signed 20 (11 previous quarter) multi-year, multi-million
deals in Q4FY11 coupled with 9,572 gross additions. IT services
attrition declined modestly to 16.5% vs. 17.0% in Q3FY11.
V a l u a t i o n
We are shifting our valuation metric to FY13 vs. FY12 earlier and valuing
HCL Tech at 15x our FY13E EPS estimate of |36.6. The management
commentary of focusing on revenue growth vs. operating margins
jeopardises our central theme of riding operating margin expansion at
HCL Tech. Thus, we are downgrading HCL Tech from BUY to HOLD as we
believe operating margin expansion is essential for P/E multiple re-rating.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
C h a n g e i n s t r a t e g y l e a d s t o d o w n g r a d e…
While persistent revenue growth through mining of existing customers
and market share gains is imperative, we believe sustainable operating
margin expansion was essential - in HCL Tech’ case - for PE multiple rerating. Noticeably, the central theme for HCL Tech’s FY12E/FY13E
revenue growth outperformance rests on the assumption that it gains
market share from incumbent vendors. Though HCL has been successful
at this in the past, we are circumspect as this could pressurise pricing for
renewed deals; eventually impacting operation margins and jeopardises
our central theme of riding operating margin expansion at HCL Tech.
Consequently, we are downgrading HCL Technology from BUY to HOLD.
ƒ Earnings summary
The Q4FY11 numbers were generally in line with our estimate.
Revenues grew 5.5% to | 4,304 crore vs. our | 4,220 crore estimate.
Reported EBITDA of | 794.1 crore on an 18.5% EBITDA margin was
also in line with our | 780.7 crore EBITDA and 18.5% margin
estimate. Net income was at | 511 crore vs. our | 512 crore estimate
ƒ Operating metric highlights
Banking, financial services & insurance, 26% of revenue, grew at
only 2% QoQ in constant currency (CC) vs. 10.5% in Q3FY11.
Energy-utilities & manufacturing had robust growth of 18.7% and
7.6% QoQ, respectively, led by continued demand. Telecom
continues to be weak with 8.3% QoQ decline vs. 0.3% QoQ decline
in Q3. HCL signed 20 (11 previous quarter) multi-year, multi-million
deals in Q4FY11 coupled with 9,572 gross additions. IT services
attrition declined modestly to 16.5% vs. 17.0% in Q3FY11.
V a l u a t i o n
We are shifting our valuation metric to FY13 vs. FY12 earlier and valuing
HCL Tech at 15x our FY13E EPS estimate of |36.6. The management
commentary of focusing on revenue growth vs. operating margins
jeopardises our central theme of riding operating margin expansion at
HCL Tech. Thus, we are downgrading HCL Tech from BUY to HOLD as we
believe operating margin expansion is essential for P/E multiple re-rating.
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