HCL Tech Ltd (Q4 F6/12)

India Infoline News Service | Mumbai |

HCLT's continued its strong revenue performance with consolidated dollar revenues growing 3% qoq to US$1.08bn. Notably, the constant currency growth of 4.6% qoq was the highest among all Tier-1 players.

CMP Rs514, Target Rs625, Upside 21.6% 
  • Better than expected volume/revenue performance; Infrastructure services shine

  • Broad-based growth across services, verticals & geographies; Top5/10 clients continue to drive growth

  • OPM performance materially ahead of estimates; Employee additions strong

  • Strong quarter on the back of robust deal wins; Increase estimates to factor in better than expected performance; Maintain BUY

Result table
(Rs mn) Q4 F6/12 Q3 F6/12 % qoq Q4 F6/11 % yoy
Net sales 59,191 52,156 13.5 43,036 37.5
Operating profit 13,008 9,591 35.6 7,949 63.6
OPM (%) 22.0 18.4 359 bps 18.5 351 bps
Depreciation (1,524) (1,413) 7.9 (1,289) 18.2
Other income (423) (136) 211.0 154 -
PBT 11,061 8,042 37.5 6,814 62.3
Tax (2,525) (2,016) 25.2 (1,701) 48.4
Effective tax rate (%) 22.8 25.1 - 25.0 -
ESOP Charge (128) (208) (38.5) (197) (35.0)
Adjusted PAT 8,408 5,818 44.5 4,914 71.1
Adj. PAT margin (%) 14.2 11.2 305 bps 11.4 279 bps
Reported PAT 8,536 6,026 41.7 5,111 67.0
EPS (Rs) 12.4 8.7 41.7 7.4 67.0
Source: Company, India Infoline Research

Better than expected volume/revenue performance; Infrastructure services shine

HCLT's continued its strong revenue performance with consolidated dollar revenues growing 3% qoq to US$1.08bn. Notably, the constant currency growth of 4.6% qoq was the highest among all Tier-1 players.  The growth was higher than our expectation despite software services growth being slightly below expectation  (2.3% qoq dollar revenue  growth versus expectation of 3% growth).  This was largely due to the very strong growth in Infrastructure services business which 9%+ qoq in cc terms. Ramping up of large deals won in last two quarters are estimated to have led to the stellar traction in Infrastructure services. For the software services business, the volumes grew by 1.8% qoq with dollar based pricing improving 0.4% qoq. BPO de-grew 2% qoq in cc basis.


Broad-based growth across services, verticals & geographies; Top5/10 clients continue to drive growth

The growth for HCLT across services/verticals/geographies was pleasantly broad based. Except pockets like Telecom (-2.8% qoq cc) and BPO (-2% qoq cc) the growth was appreciable all across. Amongst verticals, Financial services (a key drag for peers) grew 5.2% qoq in cc. Other verticals that led growth were Healthcare (+22.9 qoq cc) and E&U (13% qoq cc). Within services, a notable positive was the strong growth in discretionary services viz. Enterprise applications (+4.8% qoq cc) and Engineering and R&D services (+4% qoq cc). Across geographies, growth was led by Europe (+7.1% qoq cc) followed by ROW (+6.9 %qoq cc). Client mining remained strong with Top5/10 clients continuing to ramp up posting 6.6%/5.4% qoq cc growth.

 

Number of US$100mn+ clientele also improved by 1. A strong order backlog due to the deals wins in last couple of quarters, we believe, has resulted in this all round impressive growth. This is especially evident in the strong growth in BFSI verticals as well as discretionary services which remained challenged in  the current macro environment.


OPM performance materially ahead of estimates; Employee additions strong

The material positive surprise from the Q4 F6/12 results of HCLT was the substantial beat in terms of operating margin performance. Against our expectation of 50bps expansion on a consolidated basis, the OPM expanded 360bps qoq boosted by operational improvements and rupee depreciation. More specifically, forex had a positive impact of 223bps on the margin and productivity gains and SG&A leverage positively impacted the margin by 115bps and 34bps respectively. Company has also guided for 180-200bps margin impact in next two quarters due to salary hikes (8% offshore and 2% onsite). Strong revenue growth, material margin expansion and lower tax rate resulted in 42% qoq jump in PAT to Rs8.4bn against our expectation of Rs6.7bn.  Employee additions have been strong especially in the infrastructure services (+8% over Q3 F6/12 base) and software services (+3% of its Q3 F6/12 base). IT services attrition trended down marginally from 15% to 14% qoq.


Strong quarter on the back of robust deal wins; Increase estimates to factor in better than expected performance; Maintain BUY

Strong revenue traction seen during the quarter reflect the execution of the ~US$2.5bn of deal wins in the H2 FY12. HCLT’s strategy of focusing on the re-bid market (old outsourcing contracts coming in renegotiations) during this period is paying quick dividends. This is validated by the TPI (industry analyst) commentary which suggests strong expansion in re-bid market in H1 CY12 as opposed to sharp fall in new projects RFPs during the same period. Up-selling and cross selling in the newly acquired clientele as well as further traction in the re-bid market should help HCLT sustain the growth momentum in near to medium term. OPM margin at current level (19% for F6/12) appear to be sustainable going forward considering the operational efficiencies from execution of the large deals (higher offshoring, pyramid re-sizing and SG&A leverage). We expect 12%/17% dollar revenue/rupee earnings CAGR over F6/12-F6/14E for HCLT. Maintain BUY.


Financial summary
Y/e 30 June (Rs m) F6/11 F6/12E F6/13E F6/14E
Revenues 158,556 210,312 249,109 277,136
yoy growth (%) 26.2 32.6 18.4 11.3
Operating profit 27,191 40,250 50,564 54,114
OPM (%) 17.1 19.1 20.3 19.5
Pre-exceptional PAT 17,768 26,110 33,391 35,642
Reported PAT 16,876 25,310 32,521 34,742
yoy growth (%) 38.9 50.0 28.5 6.8
         
EPS (Rs) 25.6 37.6 48.1 51.3
P/E (x) 18.6 12.6 9.9 9.3
Price/Book (x) 4.2 3.3 2.6 2.1
EV/EBITDA (x) 12.0 7.7 5.7 4.9
RoE (%) 25.5 30.2 30.5 26.1
RoCE (%)
BSE 877.05 6.65 (0.76%)
NSE 877.65 7.20 (0.83%)

***Note: This is a NSE Chart

 

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