For 1QFY2012, HCL Technologies (HCL Tech) reported lower-than-expected
results. Volume growth during the quarter was modest at 5.1% qoq. The company
signed 12 transformational deals during the quarter. Management has indicated
that deal bookings will be higher in 4QCY2011 as compared to 9MCY2011,
which is indicated by TPI data – according to which ~US$8bn of restructuring
deals are coming for renewals in OND2011. HCL Tech has been a beneficiary of
the return in demand for enterprise services, and we expect it to ride on spending
on discretionary services. We maintain our Buy rating on the stock.
Quarterly highlights: For 1QFY2012, HCL Tech reported revenue of
US$1,002mn, up 4.1% qoq, on the back of 5.1% qoq volume growth (volume
growth of 4.0% qoq in core software services and 5.8% qoq in infrastructure
services). EBITDA and EBIT margins declined by 138bp and 120bp qoq to 17.1%
and 14.3%, respectively, because of 200bp negative impact due to wage hikes
given during the quarter – this impact was partially absorbed by qoq depreciating
INR against USD. PAT came in at `497cr, negatively affected by `18cr forex loss.
Outlook and valuation: Management is witnessing a strong demand environment
and has signed 12 transformational deals in 1QFY2012 itself on the back of 20
sign-offs in 4QFY2011. We expect HCL Tech to be the outperformer among tier-I
IT companies, with USD and INR revenue CAGR of 19.6% and 20.6%,
respectively, over FY2011–13E, on the back of its higher-value services portfolio.
At the operating front, levers such as 1) managing SG&A, 2) expanding utilization
and 3) turnaround in the BPO segment are expected to improve margins.
Thus, we expect EBITDA to grow at a 22.5% CAGR over FY2011–13E. PAT, on the
other hand, is expected to post a much higher CAGR of 27.7%, with improving
profitability, forex gains on hedges and treasury gains. We maintain our Buy
rating on the stock with a target price of `545.
results. Volume growth during the quarter was modest at 5.1% qoq. The company
signed 12 transformational deals during the quarter. Management has indicated
that deal bookings will be higher in 4QCY2011 as compared to 9MCY2011,
which is indicated by TPI data – according to which ~US$8bn of restructuring
deals are coming for renewals in OND2011. HCL Tech has been a beneficiary of
the return in demand for enterprise services, and we expect it to ride on spending
on discretionary services. We maintain our Buy rating on the stock.
Quarterly highlights: For 1QFY2012, HCL Tech reported revenue of
US$1,002mn, up 4.1% qoq, on the back of 5.1% qoq volume growth (volume
growth of 4.0% qoq in core software services and 5.8% qoq in infrastructure
services). EBITDA and EBIT margins declined by 138bp and 120bp qoq to 17.1%
and 14.3%, respectively, because of 200bp negative impact due to wage hikes
given during the quarter – this impact was partially absorbed by qoq depreciating
INR against USD. PAT came in at `497cr, negatively affected by `18cr forex loss.
Outlook and valuation: Management is witnessing a strong demand environment
and has signed 12 transformational deals in 1QFY2012 itself on the back of 20
sign-offs in 4QFY2011. We expect HCL Tech to be the outperformer among tier-I
IT companies, with USD and INR revenue CAGR of 19.6% and 20.6%,
respectively, over FY2011–13E, on the back of its higher-value services portfolio.
At the operating front, levers such as 1) managing SG&A, 2) expanding utilization
and 3) turnaround in the BPO segment are expected to improve margins.
Thus, we expect EBITDA to grow at a 22.5% CAGR over FY2011–13E. PAT, on the
other hand, is expected to post a much higher CAGR of 27.7%, with improving
profitability, forex gains on hedges and treasury gains. We maintain our Buy
rating on the stock with a target price of `545.
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