HCL Technologies (Q2 F6/13)

India Infoline News Service | Mumbai |

Dollar revenues out-perform on the back of strong Infra services growth; Software services continues to be tepid

CMP Rs703, Target Rs810, Upside 13.8%
  • Dollar revenues out-perform on the back of strong Infra services growth; Software services continues to be tepid

  • Narrow growth across verticals, services;  BFSI, Infrastructure services boost performance 

  • Material OPM beat due to utilization, efficiency improvement; Marginal reduction in employee base

  • Upgrade earnings on the back of strong performance; Maintain BUY

Result table
(Rs mn) Q2 F6/13 Q1 F6/12 % qoq Q2 F6/12 % yoy
Net sales 62,737 60,910 3.0 52,452 19.6
Operating profit 14,166 13,510 4.9 9,702 46.0
OPM (%) 22.6 22.2 40 bps 18.5 408 bps
Depreciation (1,722) (1,692) 1.8 (1,395) 23.4
Other income 154 (253) (160.9) (670) -
PBT 12,598 11,565 8.9 7,637 65.0
Tax (2,951) (2,718) 8.6 (1,911) 54.4
Effective tax rate (%) 23.4 23.5 - 25.0 -
ESOP Charge (202) (203) (0.5) (199) 1.5
Adjusted PAT 9,445 8,644 9.3 5,527 70.9
Adj. PAT margin (%) 15.1 14.2 86 bps 10.5 452 bps
Reported PAT 9,647 8,847 9.0 5,726 68.5
EPS (Rs) 14.0 12.8 9.0 8.3 68.5
Source: Company, India Infoline Research

Dollar revenues out-perform on the back of strong Infra services growth; Software services continues to be tepid

HCL Tech’s consolidated dollar revenues registered a 3.6% sequential growth ahead of our expectation 2.8% qoq growth. Consolidated volumes growth of 3% was largely supported by strong growth in Infrastructure services (+10% qoq in constant currency). The strong growth in Infra services was offset by continued sluggishness in software services business which grew 1% qoq in dollar terms (+0.5% qoq in Q1 F6/13). This was on the back of a meager volume growth of 0.4% qoq. As expected from the management commentary in past 2-3 quarters, HCLT registered deal wins with a TCV of US$1bn which include six large transformation deals.


Narrow growth across verticals, services; BFSI, Infrastructure services boost performance 

The Q2 F6/13 performance for HCLT was narrow based across its services, verticals and geographies. Amongst verticals, growth was driven by BFSI which grew 10.9% in dollar terms followed by Energy& utilities (+5.1% qoq) and Media Entertainment (+3.6% qpq). Telecom was a key laggard de-growing 1.9% qoq growth. Within services, growth was once again led by Infra services which grew 10.6% in dollar terms (contributing 80% of incremental revenues). Discretionary services of EAS and Engineering continued to be laggards (-1.1% and +0.7% qoq in dollar terms). Across geographies, Europe showed strong up-tick (+5.8% qoq) as also witnessed in larger peers followed by US (+3.4% qoq). 


Growth amongst clients was driven by Top6-10 clients which grew 6.1% qoq in dollar terms with Top 5 clients growth being tepid at 0.4% qoq.


Material OPM beat due to utilization, efficiency improvement; Marginal reduction in employee base

We were positively surprised by the expansion of the consolidated operating margin which was ~180 bps ahead of our expectation. OPM of all the three business segments of software services, infrastructure services and BPO expanded despite the impact of partial salary hikes during the quarter. The BPO business has turned in a fourth consecutive quarter of margin expansion with current OPM of 11.5% (v/s -2.1% in Q2 F6/12). Specifically, the salary hike impact (91bps) was more than offset increase in utilization (63bps), efficiencies from reduction in sub-contractor costs/other pyramid rationalization (35bps) and G&A leverage (33bps). A beat on the revenues as well as OPM has resultantly led to a 10% qoq growth in PAT to Rs9.67bn. There was a net reduction in the consolidated employee base on the back of reduction of about 400 employees in IT services business.  IT services attrition (quarterly annualized) inched up marginally.


Upgrade earnings on the back of strong performance; Maintain BUY

Q2 F6/13 performance for HCLT was stronger than anticipated with a material beat on OPM front. Ramp-ups of previously won deals have continued the impressive revenue growth momentum. HCLT strategy of first garnering deals as they come up for re-bid and later focusing on their execution has worked out impressively. This is evident in the industry leading revenue growth and the commendable up-tick in margin profile (+400bps) in past four quarters.  Additional US$1bn TCV of deal wins further add to the revenue visibility in the near to medium term. While the elevation of Mr. Anant Gupta was largely on expected lines, the continuance of Mr. Vineet Nayar as the non executive vice-chairman for the key task of handling important client relationships was a positive. We believe, HCLT’s well diversified services portfolio, balanced strategy and continued deal wins should keep its performance in the top quartile of its peer set. We maintain our positive stance and raise our estimates to factor in the robust quarter and decent deal wins. Maintain BUY with increased 9-month TP of Rs810 (Rs650 earlier). 


Financial Summary
Y/e 30 Jun (Rs m) F6/12 F6/13E F6/14E F6/15E
Revenues 210,312 252,180 276,286 305,408
yoy growth (%) 32.6 19.9 9.6 10.5
Operating profit 40,250 56,007 59,795 65,654
OPM (%) 19.1 22.2 21.6 21.5
Reported PAT 25,310 36,610 39,189 42,357
yoy growth (%) 50.0 44.6 7.0 8.1
         
EPS (Rs) 37.6 54.0 57.8 62.4
P/E (x) 18.8 13.1 12.3 11.4
Price/Book (x) 5.0 3.8 3.0 2.4
EV/EBITDA (x) 11.7 7.9 6.9 5.7
RoE (%) 30.2 33.6 28.0 24.0
RoCE (%) 31.9 36.3 31.4 27.6
Source: Company, India Infoline Research

BSE 890.00 9.25 (1.05%)
NSE 891.80 8.95 (1.01%)

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