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http://content.icicidirect.com/mailimages/ICICIdirect_HCLTech_Q3FY12.pdf
V a l u a t i o n i n l i n e w i t h p e e r s ; m a i n t a i n H O L D …
HCL Tech reported a good set of numbers. US$ revenues grew 2.5% QoQ
helped by software services (grew 1.5% QoQ) & infrastructure services
(5.2%, IMS). Note, IMS likely benefited from the spilled over contracts of
Q2. Finally, though HCL Tech’s commentary was encouraging, weakness
in financial services & retail vertical and US geography was evident and
consistent with what Infosys reported last week. This implies, concerns
are industry wide and not Infosys specific. We maintain our HOLD rating
as valuations have caught up large peers (Exhibit 1) who continue to
operate at superior margin profile relative to HCL Tech.
V a l u a t i o n s
We expect FY12E US$ revenues to grow 16.9% while rupee revenue/EPS
could grow 28.5%/33.2%, respectively, which translates to a revenue/EPS
CAGR of ~22%/24.9%during FY10-13E. We have modestly adjusted our
FY12E/FY13E EBITDA margins to 18%/17.8% vs. 17.7%/17.4% earlier
primarily due to a change in the rupee assumption. We have changed our
valuation methodology and now value HCL Tech based on CY13E
estimates. We have valued HCL Tech at | 520, i.e. at 13x our CY13E EPS
estimate of | 40 and maintained our HOLD rating.
Earnings summary
US$ revenues grew 2.5% QoQ (2.9% estimate) to $1,048 million while
those in rupees declined 0.6% QoQ (0.2% growth estimate) to
| 5,216 crore. EBIT margins declined 11 bps QoQ to 15.7%, above our
15.2% estimate. EBIT margins were positively impacted by BPO, which
became EBIT neutral ($0.2 million profit vs. $3.5 million loss in Q2) while
the appreciating rupee created a drag. Reported PAT of | 603 crore was
ahead of our | 590 crore estimate aided by higher EBIT margins.
Operating metric highlights
Sequentially, volumes grew 2.9% while client additions stood at 52.
Inactive clients stood at 52 vs. 21 in Q2. The company won multi-year
transformational deals worth $1.5 billion (~70% new accounts). On an
LTM basis, Top 5 client revenues grew 4.5% QoQ-CC while Top 10 and
Top 20 grew 3.6% and 3.2%, respectively. The company added 4,697
gross heads (-612 net). IT services attrition declined 70 bps to 15.0 vs.
15.7 in Q2.
Vertical & service line trends
Financial services & retail and CPG (24% and 8.6% of Q3 revenues)
declined 4.1% and 0.3% QoQ-constant currency (CC), respectively.
Manufacturing, healthcare and energy utilities verticals grew 0.6%, 8.1%
and 7.6% QoQ-CC, respectively. Enterprise application contribution
increased 40 bps QoQ to 20.7% vs. 20.3% in Q2 and grew 3.5% QoQ-CC.
Custom application & engineering R&D contribution declined 70 bps and
40 bps, respectively. BPO grew 5.5% QoQ. Infrastructure service
revenues grew 4.5% vs. a 0.7% QoQ decline in Q2.
Valuations
We expect FY12E US$ revenues to grow 16.9% while rupee revenue/EPS
could grow 28.5%/33.2%, respectively, which translates to a revenue/EPS
CAGR of ~22%/24.9%during FY10-13E. We have modestly adjusted our
FY12E/FY13E EBITDA margins to 18%/17.8% vs. 17.7%/17.4% earlier
primarily due to a change in the rupee assumption. We have changed our
valuation methodology and have now valued HCL Tech based on CY13E
estimates. We have valued HCL Tech at | 520, i.e. at 13x our CY13E EPS
estimate of | 40 and maintained our HOLD rating.
Risks and concerns
Macro remains uncertain and could alter the IT spending pattern in CY12.
Further, though the rupee created tailwinds, cross-currency volatility
remains a key concern.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
http://content.icicidirect.com/mailimages/ICICIdirect_HCLTech_Q3FY12.pdf
V a l u a t i o n i n l i n e w i t h p e e r s ; m a i n t a i n H O L D …
HCL Tech reported a good set of numbers. US$ revenues grew 2.5% QoQ
helped by software services (grew 1.5% QoQ) & infrastructure services
(5.2%, IMS). Note, IMS likely benefited from the spilled over contracts of
Q2. Finally, though HCL Tech’s commentary was encouraging, weakness
in financial services & retail vertical and US geography was evident and
consistent with what Infosys reported last week. This implies, concerns
are industry wide and not Infosys specific. We maintain our HOLD rating
as valuations have caught up large peers (Exhibit 1) who continue to
operate at superior margin profile relative to HCL Tech.
V a l u a t i o n s
We expect FY12E US$ revenues to grow 16.9% while rupee revenue/EPS
could grow 28.5%/33.2%, respectively, which translates to a revenue/EPS
CAGR of ~22%/24.9%during FY10-13E. We have modestly adjusted our
FY12E/FY13E EBITDA margins to 18%/17.8% vs. 17.7%/17.4% earlier
primarily due to a change in the rupee assumption. We have changed our
valuation methodology and now value HCL Tech based on CY13E
estimates. We have valued HCL Tech at | 520, i.e. at 13x our CY13E EPS
estimate of | 40 and maintained our HOLD rating.
Earnings summary
US$ revenues grew 2.5% QoQ (2.9% estimate) to $1,048 million while
those in rupees declined 0.6% QoQ (0.2% growth estimate) to
| 5,216 crore. EBIT margins declined 11 bps QoQ to 15.7%, above our
15.2% estimate. EBIT margins were positively impacted by BPO, which
became EBIT neutral ($0.2 million profit vs. $3.5 million loss in Q2) while
the appreciating rupee created a drag. Reported PAT of | 603 crore was
ahead of our | 590 crore estimate aided by higher EBIT margins.
Operating metric highlights
Sequentially, volumes grew 2.9% while client additions stood at 52.
Inactive clients stood at 52 vs. 21 in Q2. The company won multi-year
transformational deals worth $1.5 billion (~70% new accounts). On an
LTM basis, Top 5 client revenues grew 4.5% QoQ-CC while Top 10 and
Top 20 grew 3.6% and 3.2%, respectively. The company added 4,697
gross heads (-612 net). IT services attrition declined 70 bps to 15.0 vs.
15.7 in Q2.
Vertical & service line trends
Financial services & retail and CPG (24% and 8.6% of Q3 revenues)
declined 4.1% and 0.3% QoQ-constant currency (CC), respectively.
Manufacturing, healthcare and energy utilities verticals grew 0.6%, 8.1%
and 7.6% QoQ-CC, respectively. Enterprise application contribution
increased 40 bps QoQ to 20.7% vs. 20.3% in Q2 and grew 3.5% QoQ-CC.
Custom application & engineering R&D contribution declined 70 bps and
40 bps, respectively. BPO grew 5.5% QoQ. Infrastructure service
revenues grew 4.5% vs. a 0.7% QoQ decline in Q2.
Valuations
We expect FY12E US$ revenues to grow 16.9% while rupee revenue/EPS
could grow 28.5%/33.2%, respectively, which translates to a revenue/EPS
CAGR of ~22%/24.9%during FY10-13E. We have modestly adjusted our
FY12E/FY13E EBITDA margins to 18%/17.8% vs. 17.7%/17.4% earlier
primarily due to a change in the rupee assumption. We have changed our
valuation methodology and have now valued HCL Tech based on CY13E
estimates. We have valued HCL Tech at | 520, i.e. at 13x our CY13E EPS
estimate of | 40 and maintained our HOLD rating.
Risks and concerns
Macro remains uncertain and could alter the IT spending pattern in CY12.
Further, though the rupee created tailwinds, cross-currency volatility
remains a key concern.
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