HCL Technologies Results

Document Sample
HCL Technologies Results Powered By Docstoc
					                                                                                                         3QFY2012 Result Update | IT
                                                                                                                           April 18, 2012



 HCL Technologies                                                                            ACCUMULATE
                                                                                             CMP                                    `496
 Performance Highlights                                                                      Target Price                           `560
 (` cr)                    3QFY12         2QFY12     % chg (qoq)   3QFY11     % chg (yoy)    Investment Period              12 Months
 Net revenue                 5,216         5,245           (0.6)    4,138           26.0
                                                                                            Stock Info
 EBITDA                        959           970           (1.1)      768           25.0
                                                                                            Sector                                      IT
 EBITDA margin (%)             18.4         18.5         (11)bp      18.5         (16)bp
                                                                                            Market Cap (` cr)                      33,896
 PAT                           603           573            5.2       519           16.1
                                                                                            Beta                                      1.1
 Source: Company, Angel Research
                                                                                            52 Week High / Low                   528/360
 For 3QFY2012, HCL Technologies (HCL Tech) reported a modest set of numbers.
                                                                                            Avg. Daily Volume                      85,569
 The most remarkable highlight of the result was deal bookings (excluding contract
                                                                                            Face Value (`)                              2
 renewals) of US$1.5bn plus across 14 customers in this quarter and US$2.5bn
 plus in the last six months across 32 customers. Management has indicated that             BSE Sensex                             17,392
 most of the deal bookings since the last six months are coming from vendor                 Nifty                                   5,300
 consolidation. We recommend Accumulate on the stock.                                       Reuters Code                      HCLT.BO
 Quarterly highlights: For 3QFY2012, HCL Tech reported revenue of                           Bloomberg Code                    HCLT@IN
 US$1,048mn, up 2.5% qoq, on the back of 2.9% qoq volume growth in core
 software business and USD revenue growth of 4.5% qoq in CC terms in
 infrastructure services business. EBITDA and EBIT margins declined slightly by             Shareholding Pattern (%)
 11bp and 16bp qoq to 18.4% and 15.7%, respectively, because of 91bp negative               Promoters                                64.2
 impact due to exchange movement, which was partially offset by 75bp positive               MF / Banks / Indian Fls                   8.2
 impact on account of an increase in operational efficiencies. PAT came in at               FII / NRIs / OCBs                        18.9
 `603cr, impacted by forex loss of `36cr, during the quarter.
                                                                                            Indian Public / Others                    8.7
 Outlook and valuation: Management is witnessing a robust demand environment
 and has done deal bookings worth US$2.5bn plus over the last six months,
 excluding contract renewals. Management maintained its stance that the deals are           Abs. (%)                 3m     1yr       3yr
 out of vendor-churn exercises rather than any incremental spending. However, we            Sensex                   5.7   (8.9)     57.8
 believe, in such a competitive scenario where all companies are eyeing the
                                                                                            HCL Tech             18.7      6.8      283.6
 existing pool of deals, an aggressive company like HCL Tech with end-to-end IT
 capabilities will emerge as a front-runner. We expect HCL Tech to post USD and
 INR revenue CAGR of 12.5% and 12.4%, respectively, over FY2012–14E, on the
 back of its higher-value services portfolio, which is set to address the current
 demand landscape. We expect EBITDA to post a 10% CAGR over FY2012–14E.
 PAT, on the other hand, is expected to post a higher CAGR of 15.3%, with
 improving profitability, forex gains on hedges and treasury gains. We recommend
 Accumulate on the stock with a target price of `560.
 Key financials (Consolidated, US GAAP)
 Y/E June (` cr)               FY2010       FY2011      FY2012E     FY2013E      FY2014E
 Net sales                     12,564       16,034       20,390      22,792       25,743
 % chg                             18.2       27.6          27.2       11.8          12.9
 Net profit                     1,310        1,874         2,284      2,647        3,017
 % chg                              2.6       43.0          21.9       15.9          14.0
 EBITDA margin (%)                 20.5       18.2          18.2       17.4          17.4
 EPS (`)                           19.0       26.8          32.6       37.8          43.0
 P/E (x)                           26.0       18.5          15.2       13.1          11.5
 P/BV (x)                           4.8        4.1           3.4        2.9           2.4
 RoE (%)                           18.6       22.2          22.9       22.3          21.3
 RoCE (%)                          15.3       16.5          20.1       20.2          20.4
                                                                                            Ankita Somani
 EV/Sales (x)                       2.8        2.1           1.7        1.5           1.3
                                                                                            +91 22 3935 7800 Ext: 6819
 EV/EBITDA (x)                     13.4       11.7           9.3        8.5           7.3
                                                                                            ankita.somani@angelbroking.com
 Source: Company, Angel Research
Please refer to important disclosures at the end of this report                                                                          1
                                                                                  HCL Technologies | 3QFY2012 Result Update



Exhibit 1: 3QFY2012 performance (Consolidated, US GAAP)
 Y/E June (` cr)                   3QFY12    2QFY12      % chg (qoq)    3QFY11        % chg (yoy)     9MFY12      9MFY11         % chg (yoy)
 Net revenue                        5,216     5,245            (0.6)      4,138             26.0      15,112       11,735               28.8
 Cost of revenue                    3,518     3,514              0.1      2,761             27.4      10,219        7,940               28.7
 Gross profit                       1,698     1,731            (1.9)      1,377             23.3       4,893        3,795               28.9
 SG&A expense                         739       761            (2.9)        610             21.1       2,169        1,772               22.4
 EBITDA                               959       970            (1.1)        768             25.0       2,724        2,023               34.7
 Dep. and amortisation                141       139              1.3        120             17.7         412            369             11.6
 EBIT                                 818       831            (1.6)        648             26.3       2,313        1,654               39.8
 Other income                          23         9                           13                          55             19
 PBT                                  841       840              0.1        660             27.3       2,368        1,672               41.6
 Income tax                           202       191              5.5        130             55.1         566            316             79.2
 PAT                                  639       649            (1.5)        530             20.5       1,803        1,357               32.8
 Forex loss                           (36)      (76)          (52.1)        (11)           224.1        (130)           (90)            44.3
 Adjusted PAT                         603       573              5.2        519             16.1       1,673        1,267               32.0
 EPS                                  8.6       8.2              4.9         7.4            16.0        23.9            18.2            31.4
 Gross margin (%)                    32.5      33.0           (45)bp        33.3          (73)bp        32.4            32.3            4bp
 EBITDA margin (%)                   18.4      18.5           (11)bp        18.5          (16)bp        18.0            17.2           79bp
 EBIT margin (%)                     15.7      15.8           (16)bp        15.6             3bp        15.3            14.1          121bp
 PAT margin (%)                      11.5      10.9            61bp         12.5         (100)bp        11.0            10.8           25bp
 Source: Company, Angel Research


                                                Exhibit 2: 3QFY2012 – Actual vs. Angel estimates
                                                (` cr)                                       Actual         Estimate           Variation (%)
                                                Net revenue                                  5,216              5,288                  (1.4)
                                                EBITDA margin (%)                             18.4               18.8                (40)bp
                                                PAT                                            603               616                   (2.2)
                                                Source: Company, Angel Research

                                                Modest revenue growth
                                                For 3QFY2012, HCL Tech reported revenue of US$1,048mn, up 2.5% qoq, on the
                                                back of ~2.0% qoq volume growth. Cross-currency movement aided the
                                                company’s USD revenue by 0.6% qoq. In constant currency (CC) terms, revenue
                                                grew by 1.9% qoq to US$1,041.8mn.

                                                HCL Tech’s revenue growth was led by modest volume growth of 2.9% in core
                                                software services and robust USD revenue growth of 4.5% qoq in CC terms in
                                                infrastructure services business. Volume growth of 2.9% qoq in core software
                                                services was on account of 5.4% qoq offshore volume growth, however onsite
                                                volume declined by 3.7% qoq.

                                                The most remarkable highlight of the result was deal bookings (excluding contract
                                                renewals) of US$1.5bn plus across 14 customers in 3QFY2012, with financial
                                                services being the leading industry segment in this and contributing ~46% to the
                                                overall share. Also, HCL Tech has won orders worth US$2.5bn plus in the last six
                                                months across 32 customers and 88% of these were from Fortune 500/Global
                                                2,000 companies. Most of these large deals have come from vendor consolidation
                                                exercises going on across the globe, which is leading to vendor churn.



April 18, 2012                                                                                                                            2
                                                      HCL Technologies | 3QFY2012 Result Update



                 Exhibit 3: Volume growth trend (Effort wise)
                       8

                             5.6
                       6                                                               5.7         5.4
                                         4.9                                                 4.9
                                                                       4.9 4.0   4.6
                                                                 3.7
                       4                       3.0         3.0
                                   3.0               3.0                                                     2.9

                       2



                 (%)
                       0
                              3QFY11           4QFY11            1QFY12          2QFY12            3QFY12
                       (2)


                       (4)                                                                           (3.7)
                                                 Offshore               Onsite          Total

                 Source: Company, Angel Research

                 In INR terms, revenue came in at `5,216cr, down 0.6% qoq; lower growth as
                 against USD revenue growth was due to qoq INR appreciation against USD.

                 Core software services posted decent growth: During the quarter, core software
                 services (contributed 71% to revenue) posted reasonable 1.5% qoq revenue growth
                 (USD terms) to US$747mn, led by 2.9% qoq volume growth. In CC terms, revenue
                 growth in core software services came in at 0.9% qoq. This was on the back of
                 USD revenue growth of 3.5% and 1.0% (CC terms) in enterprise application
                 services (EAS, contributed 20.7% to revenue) and engineering and R&D services
                 (ERD, contributed 18.5% to revenue), respectively. Revenue from custom
                 application services (contributed 32.1% to revenue) declined by 0.8% qoq
                 (CC terms). The EAS service vertical has emerged as a dark horse for the company
                 and revenue from this service is growing strongly since the last two quarters. In
                 EAS, the company is witnessing traction from areas such as mobility and cloud.

                 Infrastructure services again back on the growth track: The infrastructure
                 management services (IMS) segment (contributed 24.0% to revenue) reported a
                 5.1% qoq increase in its revenue (USD terms) to US$251mn. In CC terms, revenue
                 of IMS grew by 4.5% qoq. Management indicated that IMS is doing well globally.
                 Currently, the segment is witnessing continued demand traction for technology and
                 operational transformation outsourcing as well as system integration. Continental
                 Europe and emerging markets are focusing on reducing operations cost, which is
                 driving transformational outsourcing.

                 BPO services led the company’s growth: The BPO segment posted 6.5% qoq
                 growth in its revenue (USD terms), with revenue coming at US$49mn. In CC terms,
                 the segment reported 5.5% qoq growth in revenue. In fact, in 4QFY2012, BPO
                 business has entered the EBITDA and EBIT positive zone. Management indicated
                 that BPO is expected to remain EBIT neutral for CY2012 and after that EBIT growth
                 is expected to pick up in BPO services. Demand environment is heating up as
                 clients are looking at globalization of delivery capabilities, which is driving
                 transformation and enterprise-wide cost efficiency. The company is continuously
                 investing in building platforms for non voice-based businesses in this segment.
                 Demand is seen in areas of cloud, mobility, social media and multi-tower end-to-
                 end process data.


April 18, 2012                                                                                                     3
                                                             HCL Technologies | 3QFY2012 Result Update



                 Exhibit 4: 3QFY2012 performance (Segment wise)
                 (US$ mn)                                     3QFY12       2QFY12     % chg qoq       3QFY11       % chg yoy
                 SOFTWARE SERVICES
                   Revenue                                       747          736              1.5       651           14.8
                   Gross profit                                  258          259             (0.3)      210           22.8
                   Gross margin (%)                              34.5        35.1         (62)bp         32.2         226bp
                   EBITDA                                        145          144              0.8       108           34.6
                   EBITDA margin (%)                             19.4        19.6         (13)bp         16.6         286bp
                   EBIT                                          128          127              0.5        90           41.5
                   EBIT margin (%)                               17.1        17.3         (17)bp         13.9         323bp


                 INFRASTRUCTURE SERVICES
                   Revenue                                       251          239              5.1       214           17.6
                   Gross profit                                    69          69              0.9        59           17.3
                   Gross margin (%)                              27.6        28.7       (117)bp          27.7          (9)bp
                   EBITDA                                          45          46             (2.6)       41             9.8
                   EBITDA margin (%)                             17.8        19.2       (142)bp          19.0       (126)bp
                   EBIT                                            36          38             (4.7)       34             8.4
                   EBIT margin (%)                               14.4        15.9       (150)bp          15.7       (124)bp


                 BPO SERVICES
                   Revenue                                         49          46              6.5        50           (0.8)
                   Gross profit                                    14          10             42.9            9        48.9
                   Gross margin (%)                              28.3        21.1         722bp          18.9         946bp
                   EBITDA                                              3       (1)                           (2)
                   EBITDA margin (%)                              5.7        (2.2)        782bp         (3.2)         888bp
                   EBIT                                                0       (4)                           (5)
                   EBIT margin (%)                                0.4        (7.5)        795bp         (9.0)         944bp
                 Source: Company, Angel Research


                 Exhibit 5: Revenue growth trend (Service wise in CC terms)
                       10                 9.2                 8.6
                       8                                         7.3
                                                                               6.5
                                                                   5.8                  5.4                           5.5
                       6           5.2
                                                                                     4.0                           4.5
                                                                                                       3.5
                       4             2.5
                                                                                                1.6
                       2     1.7                                                                          1.0
                 (%)




                       0
                                                        (0.6)                                                 (0.8)
                       (2)                                                               (0.7)
                                   4QFY11                   1QFY12(1.3)              2QFY12                  3QFY12
                       (4)

                       (6)
                                               (5.7)
                       (8)
                                         EAS           ERD      Custom application        IMS         BPO services

                 Source: Company, Angel Research




April 18, 2012                                                                                                              4
                                                   HCL Technologies | 3QFY2012 Result Update



                 HCL Tech’s anchor industry segment, manufacturing (contributed 29.0% to
                 revenue), continued its growth momentum and reported 0.6% qoq growth in CC
                 terms. Of the US$2.5bn deal bookings done by the company in the past six
                 months, manufacturing contributes 23.0%. Demand in the manufacturing space is
                 coming for business needs related to operational efficiency, cost reduction and
                 product development. Also, in the manufacturing segment, pent-up demand is
                 seen for transformation projects related to digital transformation, mobility and
                 multi-channel commerce in the U.S. and Europe. The financial services industry
                 segment witnessed some pressure during this quarter and revenue (CC terms) from
                 this vertical declined by 4.1% qoq. Management indicated that the financial
                 services industry is going through a structural change and is shifting from
                 high-margin business to low-margin business, which is creating some amount of
                 pressure on the IT spends of clients in the financial services industry. However, on
                 the optimistic side, financial services contributed 43% to the total US$2.5bn deal
                 bookings done in the past six months. In the financial services space, IT-related
                 spend is coming from work related to regulatory compliance, efficiency gains, cost
                 optimization and vendor churning.

                 The telecom and healthcare industry segment emerged as the company’s primary
                 growth driver, with its revenue (CC terms) growing by 10.0% and 8.1% qoq,
                 respectively. In addition, the energy, utilities and public sector (EPU) and media,
                 publishing and entertainment (MPE) segments posted 7.6% and 6.5% qoq (CC
                 terms) growth in their revenue, respectively.

                 Exhibit 6: Revenue growth trend (Industry wise in CC terms)
                 Growth by vertical (%)            3QFY11    4QFY11    1QFY12    2QFY12     3QFY12
                 Financial services                  10.5       2.0       2.1        6.1        (4.1)
                 Manufacturing                        6.1       7.6       8.2        4.6         0.6
                 Telecom                             (0.3)     (8.3)     (2.0)      (3.1)       10.0
                 Retail and CPG                      (0.4)     (5.2)     12.0        7.8        (0.3)
                 MPE                                  1.7      11.7       0.4       (2.2)        6.5
                 Healthcare                           0.5       2.9          -      16.9         8.1
                 EPU                                  6.3      18.7       1.6      (15.8)        7.6
                 Others                               1.3       5.5      23.1        8.0         6.2
                 Source: Company, Angel Research


                 During the quarter, HCL Tech reported growth across Europe and Rest of the
                 World, with revenue growing by 4.6% and 8.8% qoq, respectively. However,
                 revenue from the U.S. declined by 1.0% qoq (CC terms). Out of the deal bookings
                 worth US$2.5bn done in the past six months, Europe’s contribution was the highest
                 at 54%, followed by the U.S. contributing 44%.




April 18, 2012                                                                                     5
                                                   HCL Technologies | 3QFY2012 Result Update



                 Exhibit 7: Revenue growth trend (Geography wise in CC terms)
                         21
                         18     20.5
                         15
                         12
                           9                                        6.8                7.3               8.8
                                                   5.5
                           6      4.2




                  (%)
                                                                        4.5        6.3                   4.6
                           3                             3.0
                           0
                                  0.7              0.7             0.7
                          (3)                                                                         (1.0)
                          (6)
                          (9)                                                 (11.7)
                        (12)
                                3QFY11       4QFY11              1QFY12          2QFY12           3QFY12


                                           US                  Europe             Rest of the world

                 Source: Company, Angel Research


                 Hiring on purpose

                 During the quarter, HCL Tech added 4,697 gross employees, all of them being
                 lateral additions. The company witnessed net reduction of 612 employees due to
                 employee rationalization going on in BPO business, which took its total employee
                 base to 82,464.

                 In the core software services segment, 2,164 gross and 79 net employees were
                 added during the quarter, taking the segment’s total employee base to 54,703.
                 Gross lateral employee addition in this segment stood robust at 2,188, which
                 indicates that the company is witnessing a healthy deal pipeline. Attrition rate for
                 the core software services segment declined by 90bp qoq to 14.4% (LTM basis)
                 during the quarter.

                 The infrastructure services segment reported net addition of 340 employees in
                 3QFY2012, taking the segment’s total employee base to 17,771. Gross addition
                 in the segment stood at 1,139 employees, of which 1,115 were laterals, indicating
                 just-in-time hiring strategy adopted by management. Attrition rate for this segment
                 remained flat qoq at 17.0% (LTM basis).

                 The BPO segment again witnessed employee rationalization and had net reduction
                 of 1,031 employees, taking the segment’s total employee base to 9,990. The
                 company added 1,394 gross employees (all laterals) in the BPO segment during
                 the quarter. The quarterly offshore attrition rate for this segment increased by 30bp
                 qoq to 6.4% during the quarter.




April 18, 2012                                                                                                 6
                                                    HCL Technologies | 3QFY2012 Result Update



                 Exhibit 8: Hiring trend (Net addition, Service wise)
                                                   3QFY11        4QFY11     1QFY12         2QFY12     3QFY12
                 Net additions
                 Software services                     867        2,416        3,053        1,353            79
                 Infrastructure services               750        1,533          783          381           340
                 BPO                                  (464)        (323)        (362)         822      (1,031)
                 Total employees
                 Software services                  47,802       50,218      53,271        54,624      54,703
                 Infrastructure services            14,734       16,267      17,050        17,431      17,771
                 BPO                                10,884       10,561      10,199        11,021       9,990
                 Source: Company, Angel Research

                 Utilization level, offshore – including as well as excluding trainees – improved by
                 260bp and 290bp qoq to 72.2% and 79.0%, respectively, in 3QFY2012, as the
                 company mostly hired laterals in 3QFY2012 and freshers hired before this quarter
                 started getting billable. Onsite utilization level declined by 150bp qoq to 94.4%.
                 Management indicated that, going ahead, utilization level (including trainees)
                 would inch up as trainees hired couple of quarters back will start turning billable,
                 which can be an important lever to improve margins.

                 Exhibit 9: Utilization trend (%)
                        100

                                  96.5             96.2            96.0             95.9
                         90                                                                          94.4


                                                                                                     79.0
                         80       76.3                             76.5
                  (%)




                                                   76.1                             76.1


                         70
                                  71.9             72.5                                              72.2
                                                                   69.7             69.6

                         60
                                 3QFY11          4QFY11           1QFY12          2QFY12            3QFY12

                                 Offshore - Including trainees      Offshore - Excluding trainees      Onsite

                 Source: Company, Angel Research



                 Operating margin slightly down

                 During 3QFY2012, HCL Tech’s EBITDA and EBIT margins declined a little by 11bp
                 and 16bp qoq to 18.4% and 15.7%, respectively, because of INR appreciation.
                 EBIT margin movement was because of the following factors: 1) 91bp negative
                 impact due to INR appreciation; and 2) 75bp positive impact because of
                 operational efficiencies derived from improvement in utilization level and
                 rationalization in SGA expenses.




April 18, 2012                                                                                                  7
                                                   HCL Technologies | 3QFY2012 Result Update



                 Exhibit 10: Margin profile
                       40
                                                34.7
                                33.3                                        33.0              32.5
                       35                                    31.5

                       30




                 (%)
                       25
                                                20.7
                                18.5                                        18.5              18.4
                       20                                    17.1

                       15                       17.7
                                15.6                          14.3          15.8               15.7
                       10
                              3QFY11          4QFY11       1QFY12          2QFY12          3QFY12

                                        Gross margin       EBITDA margin        EBIT margin

                 Source: Company, Angel Research

                 Segment wise, EBIT margin for core software services and infrastructure services
                 declined by 17bp and 150bp qoq to 17.1% and 14.4%, respectively, in
                 3QFY2012. The BPO segment managed to pull up its operating margin and
                 became EBITDA positive from 3QFY2012. Management indicated that BPO is
                 expected to remain EBIT neutral for CY2012 and after that EBIT growth is expected
                 to pick up in BPO services.

                 Exhibit 11: BPO segment – Margin trend
                       36
                                                                                              28.3
                       30
                       24                                    20.6           21.2
                                18.9            19.2
                       18
                 (%)




                       12
                                                                                                  5.6
                        6
                                (3.2)           (1.9)          (1.6)        (2.1)
                        0                                                                         0.5

                        (6)
                              (9.1)             (8.1)        (7.2)            (7.6)
                       (12)
                              3QFY11          4QFY11       1QFY12          2QFY12          3QFY12

                                        Gross margin       EBITDA margin            EBIT margin

                 Source: Company, Angel Research



                 Client pyramid strengthens
                 During the quarter, HCL Tech enhanced its client pyramid with the addition of 52
                 new clients. The most remarkable development for the company during the quarter
                 was the addition of one client in the US$100mn plus revenue bracket. In addition,
                 one client was added in the US$40mn-50mn revenue bracket. Also, the company
                 added six new clients in the US$10mn-20mn revenue bracket. Active client base of
                 the company remained flat qoq at 516. The company’s top clients also registered
                 modest growth, with revenue from the top 5, top 10 and top 20 clients growing by
                 4.5%, 3.5% and 3.2% qoq (LTM basis), respectively.




April 18, 2012                                                                                          8
                                                   HCL Technologies | 3QFY2012 Result Update



                 Exhibit 12: Client pyramid
                  Particulars                      3QFY11   4QFY11   1QFY12     2QFY12     3QFY12
                 Active client relationship           453      467       480        516        516
                 New client relationship               58       70        66          57         52
                 US$1mn–5mn                           205      206       214        218        234
                 US$5mn–10mn                           49       53        56          60         60
                 US$10mn–20mn                          39       38        42          42         48
                 US$20mn–30mn                          12       13        14          19         19
                 US$30mn–40mn                           9       12        12          11         11
                 US$40mn–50mn                           2        1          2          3          4
                 US$50mn–100mn                          7        8          8          6          6
                 US$100mn plus                          1        1          1          3          4
                 Source: Company, Angel Research



                 Outlook and valuation

                 HCL Tech has recorded a 3.6% CQGR in its revenue over the past four quarters.
                 This is primarily on the back of discretionary services such as EAS and
                 infrastructure services maintaining their growth momentum and growing at par or
                 higher than the company’s average growth. Verticals such as manufacturing and
                 EPU have proved to be the company’s growth drivers. Also, geography wise,
                 continental Europe has proved to be a strong spender vis-à-vis its peers because of
                 a strong footprint gained in this geography post the acquisition of Axon.

                 Management is witnessing a robust demand environment and has done deal
                 bookings worth US$2.5bn plus over the last six months, excluding contract
                 renewals. Management maintained its stance that the deals are out of
                 vendor-churn exercises rather than any incremental spending. However,
                 we believe, in such a competitive scenario where all companies are eyeing the
                 existing pool of deals, an aggressive company like HCL Tech with end-to-end IT
                 capabilities and a strong client mining ability will emerge as a front runner. We
                 expect HCL Tech to be the outperformer among tier-I IT companies, with USD and
                 INR revenue CAGR of 12.5% and 12.4%, respectively, over FY2012–14E, on the
                 back of its higher-value services portfolio, which is set to address the current
                 demand landscape. At the operating front, levers such as 1) managing SG&A,
                 2) expanding utilization levels and 3) turnaround in the BPO segment on account
                 of strong growth are expected to improve the company’s margins. Thus, we expect
                 EBITDA to post a 10% CAGR over FY2012-14E. PAT, on the other hand, is
                 expected to post a higher CAGR of 15.3%, with improving profitability, forex gains
                 on hedges and treasury gains.

                 At the CMP of `496, the stock is trading at cheap valuations of 11.5x FY2014E EPS
                 of `43.0. We value the company at 13x FY2014E EPS and give it a target price of
                 `560. We recommend Accumulate on the stock.




April 18, 2012                                                                                    9
                                                                                                     HCL Technologies | 3QFY2012 Result Update



                                                   Exhibit 13: Key assumptions
                                                                                                                             FY2012                     FY2013                       FY2014
                                                    Revenue growth (USD)                                                         17.0                           12.1                   12.9
                                                    USD-INR rate (realized)                                                      49.1                           49.0                   49.0
                                                    Revenue growth (INR)                                                         27.2                           11.8                   12.9
                                                    EBITDA margin (%)                                                            18.2                           17.4                   17.4
                                                    EBIT margin (%)                                                              15.4                           14.7                   14.8
                                                    Tax rate (%)                                                                 24.9                           24.0                   25.0
                                                    EPS growth (%)                                                               21.5                           15.8                   14.0
                                                   Source: Company, Angel Research



                                                   Exhibit 14: One-year forward PE (x) chart
                                                          850
                                                          750
                                                          650
                                                          550
                                                          450
                                                    (`)




                                                          350
                                                          250
                                                          150
                                                           50




                                                                                                                                                                            Oct-11
                                                                                                                    Sep-09


                                                                                                                              Feb-10
                                                                                                Nov-08




                                                                                                                                                                   May-11
                                                                                      Jun-08




                                                                                                                                                       Dec-10
                                                                            Jan-08




                                                                                                         Apr-09
                                                                 Aug-07




                                                                                                                                        Jul-10




                                                                                                                                                                                           Mar-12
                                                                           Price                19x                16x                 13x                       10x                  6x

                                                   Source: Company, Angel Research


Exhibit 15: Recommendation summary
Company                 Reco               CMP     Tgt Price         Upside            FY2014E           FY2014E               FY2012-14E                       FY2014E       FY2014E
                                             (`)           (`)             (%)       EBITDA (%)              P/E (x)         EPS CAGR (%)                   RoCE (%)                 RoE (%)
HCL Tech                Accumulate         496            560             13.0                 17.4               11.5                    17.0                     20.4                21.3
Hexaware                Neutral            125              -                 -                18.3               12.1                     53.4                    24.1                21.6
Infosys                 Buy              2,373       2,792                17.7                 30.6               13.6                     13.4                    22.8                20.8
Infotech Enterprises    Neutral            167              -                 -                16.8                9.2                     12.9                    16.4                13.0
KPIT Cummins            Buy                  79            98             24.1                 14.9                7.3                     (1.4)                   20.0                18.0
Mahindra Satyam         Accumulate           78            89             14.2                 15.0                9.4                     25.3                    11.4                13.0
MindTree                Accumulate         527            585             11.1                 15.5                9.0                     32.9                    19.8                17.0
Mphasis                 Accumulate         380            433             14.0                 17.9                9.2                           1.7               14.1                13.7
NIIT^                   Buy                  48            61             28.0                 16.9                5.2                     18.0                    11.5                19.0
Persistent              Accumulate         335            352              5.1                 20.8                8.6                           3.8               16.1                13.8
TCS                     Buy              1,097       1,360                24.0                 28.9               15.7                     16.1                    30.6                29.9
Tech Mahindra           Accumulate         712            750              5.3                 15.7                8.2                     20.8                    12.9                18.0
Wipro                   Accumulate         427            463              8.4                 19.3               14.1                     11.8                    14.1                19.3
Source: Company, Angel Research; Note: ^Valued on SOTP basis




April 18, 2012                                                                                                                                                                               10
                                            HCL Technologies | 3QFY2012 Result Update



                 Profit and loss statement (Consolidated, US GAAP)
                 Y/E June (` cr)            FY2010   FY2011   FY2012E    FY2013E   FY2014E
                 Net sales                  12,564   16,034    20,390     22,792    25,743
                 Cost of revenues            8,196   10,749    13,757     15,664    17,893
                 Gross profit                4,369    5,285     6,633      7,128     7,851
                 % of net sales               34.8     33.0      32.5       31.3      30.5
                 SG&A expenses               1,796    2,371     2,930      3,168     3,374
                 % of net sales               14.3     14.8      14.4       13.9      13.1
                 EBITDA                      2,573    2,914     3,704      3,960     4,476
                 % of net sales               20.5     18.2      18.2       17.4      17.4
                 Dep. and amortization        501      498       560        602       667
                 % of net sales                4.0      3.1       2.7        2.6       2.6
                 EBIT                        2,072    2,416     3,144      3,358     3,809
                 % of net sales               16.5     15.1      15.4       14.7      14.8
                 Other income, net            (55)      26        49         (1)       59
                 Profit before tax           2,017    2,441     3,193      3,357     3,868
                 Provision for tax            240      485       796        806       967
                 % of PBT                     11.9     19.9      24.9       24.0      25.0
                 PAT                         1,777    1,956     2,396      2,551     2,901
                 Share from equity invst.       1         -          -         -         -
                 Forex loss                  (476)     (82)     (112)        96       116
                 Adj. net profit             1,310    1,874     2,284      2,647     3,017
                 EPS (`)                      19.0     26.8      32.6       37.8      43.0




April 18, 2012                                                                         11
                                                     HCL Technologies | 3QFY2012 Result Update



                 Balance sheet (Consolidated, US GAAP)
                 Y/E June (` cr)                             FY2010 FY2011 FY2012E FY2013E FY2014E
                 Cash and cash equivalent                      469     520      369      389      568
                 Account receivables, net                     2,514   2,591    3,519    3,934    4,475
                 Unbilled receivables                          536     816      975     1,065    1,270
                 Deposit with banks                           1,091   1,079     765      807     1,178
                 Deposit (one year with HDFC ltd)              100        -        -        -        -
                 Investment securities, available for sale     782     643      456      481      702
                 Other current assets                          885    1,255    1,360    1,520    1,717
                 Total current assets                         6,376   6,902    7,444    8,195    9,910
                 Property and equipment, net                  1,849   2,217    2,740    2,960    3,120
                 Intangible assets, net                       4,312   4,188    4,140    4,088    4,031
                 Deposits with HDFC Ltd.                          -     50       35       37       55
                 Fixed deposits with banks                        -    110       78       82      120
                 Investment securities HTM                      50      95       67       71      104
                 Investment in equity investee                  21      23       28       30       52
                 Other assets                                  964    1,039    1,123    1,196    1,288
                 Total assets                                13,571 14,624    15,655   16,660   18,678
                 Current liabilities                          3,133   3,376    3,254    3,201    3,254
                 Borrowings                                   2,663   2,124    1,732    1,084     764
                 Other liabilities                             739     689      683      480      488
                 Total liabilities                            6,535   6,189    5,670    4,766    4,506
                 Minority interest                                -       -        -        -        -
                 Total stockholder equity                     7,037   8,435    9,985   11,894   14,172
                 Total liabilities and stock holder equity   13,571 14,624    15,655   16,660   18,678




April 18, 2012                                                                                     12
                                                    HCL Technologies | 3QFY2012 Result Update



                 Cash flow statement (Consolidated, US GAAP)
                 Y/E June (` cr)                      FY2010     FY2011    FY2012E    FY2013E    FY2014E
                 Pre tax profit from operations         1,908     2,259      2,985      3,249      3,728
                 Depreciation                             501       498        560        602        667
                 Expenses (deferred)/written off        (476)       (82)     (112)         96        116
                 Pre tax cash from operations           1,934     2,675      3,433      3,947      4,511
                 Other income/prior period ad             117       182        208        108        140
                 Net cash from operations               2,051     2,857      3,641      4,055      4,651
                 Tax                                    (240)     (485)      (796)      (806)      (967)
                 Cash profits                           1,810     2,372      2,844      3,249      3,684
                 (Inc)/dec in current assets            (156)     (727)     (1,193)     (665)      (943)
                 Inc/(dec) in current liabilities       (135)       243      (122)        (52)        52
                 Net trade working capital              (290)     (484)     (1,316)     (717)      (890)
                 Cash flow from oper. actv.             1,520     1,888      1,529      2,532      2,794
                 (Inc)/dec in fixed assets              (652)     (797)     (1,035)     (770)      (770)
                 (Inc)/dec in intangibles                 109        56          0           -         0
                 (Inc)/dec in investments               (528)        45        569        (79)     (702)
                 (Inc)/dec in minority interest              -         -          -          -          -
                 Inc/(dec) in non-current liab.           (25)      (50)        (5)     (203)          8
                 (Inc)/dec in non-current assets        (103)       (75)       (84)       (73)       (92)
                 Cash flow from invest. actv.          (1,199)    (821)      (555)     (1,125)    (1,556)
                 Inc/(dec) in debt                      (314)     (539)      (392)      (648)      (320)
                 Inc/(dec) in equity/premium              770       229         (0)          -          -
                 ESOP charges                             (88)      (90)       (77)       (82)       (82)
                 Dividends                              (640)     (615)      (655)      (656)      (656)
                 Cash flow from financing actv.         (272)    (1,016)    (1,124)    (1,387)    (1,059)
                 Cash generated/(utilized)                 48        51      (150)         20        179
                 Cash at start of the year                420       469        520        369        389
                 Cash at end of the year                  469       520        369        389        568




April 18, 2012                                                                                        13
                                                       HCL Technologies | 3QFY2012 Result Update



                 Key ratios
                 Y/E June                                 FY2010    FY2011   FY2012E   FY2013E   FY2014E
                 Valuation ratio (x)
                 P/E (on FDEPS)                              26.0     18.5      15.2      13.1      11.5
                 P/CEPS                                      18.8     14.5      12.1      10.6       9.3
                 P/BVPS                                       4.8      4.1       3.4       2.9       2.4
                 Dividend yield (%)                           1.6      1.6       1.6       1.8       2.0
                 EV/Sales                                     2.8      2.1       1.7       1.5       1.3
                 EV/EBITDA                                   13.4     11.7       9.3       8.5       7.3
                 EV/Total assets                              2.6      2.3       2.2       2.0       1.7
                 Per share data (`)
                 EPS (Fully diluted)                         19.0     26.8      32.6      37.8      43.0
                 Cash EPS                                    26.3     34.1      40.9      46.8      53.0
                 Dividend                                     8.0      8.0       8.0       9.0      10.0
                 Book value                                 102.2    121.4     143.7     171.1     203.9
                 Dupont analysis
                 Tax retention ratio (PAT/PBT)                0.9      0.8       0.8       0.8       0.8
                 Cost of debt (PBT/EBIT)                      1.0      1.0       1.0       1.0       1.0
                 EBIT margin (EBIT/Sales)                     0.2      0.2       0.2       0.1       0.1
                 Asset turnover ratio (Sales/Assets)          0.9      1.1       1.3       1.4       1.4
                 Leverage ratio (Assets/Equity)               1.9      1.7       1.6       1.4       1.3
                 Operating ROE                               25.4     23.2      24.0      21.5      20.5
                 Return ratios (%)
                 RoCE (pre-tax)                              15.3     16.5      20.1      20.2      20.4
                 Angel RoIC                                  18.8     19.9      22.6      22.7      23.9
                 RoE                                         18.6     22.2      22.9      22.3      21.3
                 Turnover ratios (x)
                 Asset turnover (fixed assets)                1.8      2.2       2.6       2.8       3.0
                 Receivables days                             76       59        63        63        63




April 18, 2012                                                                                       14
                                                                                    HCL Technologies | 3QFY2012 Result Update




  Research Team Tel: 022 - 3935 7800                E-mail: research@angelbroking.com                    Website: www.angelbroking.com

  DISCLAIMER

  This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment
  decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make
  such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies
  referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and
  risks of such an investment.

  Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make
  investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this
  document are those of the analyst, and the company may or may not subscribe to all the views expressed within.

  Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and
  trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's
  fundamentals.

  The information in this document has been printed on the basis of publicly available information, internal data and other reliable
  sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this
  document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any way
  responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report.
  Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify,
  nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While
  Angel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory,
  compliance, or other reasons that prevent us from doing so.
  This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced,
  redistributed or passed on, directly or indirectly.

  Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or
  other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in
  the past.

  Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in
  connection with the use of this information.

  Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please
  refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and
  its affiliates may have investment positions in the stocks recommended in this report.




  Disclosure of Interest Statement                                                HCL Tech
  1. Analyst ownership of the stock                                                   No
  2. Angel and its Group companies ownership of the stock                             No
  3. Angel and its Group companies' Directors ownership of the stock                  No
  4. Broking relationship with company covered                                        No

  Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors



  Ratings (Returns):              Buy (> 15%)                      Accumulate (5% to 15%)                 Neutral (-5 to 5%)
                                  Reduce (-5% to 15%)              Sell (< -15%)


April 18, 2012                                                                                                                             15

				
Pratik Modi Pratik Modi CMD www.mpmodi.in
About Myself Pratik, BMS student, from Mumbai University, having all types of projects & personal notes