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HCL Tech -RU3QFY2011-20-04-11

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					                                                                                                     3QFY2011 Result Update | IT
                                                                                                                       April 20, 2011



 HCL Technologies                                                                          BUY
                                                                                           CMP                                   `523
 Performance Highlights                                                                    Target Price                          `603
 (` cr)                   3QFY11         2QFY11 % chg (qoq)       3QFY10    % chg (yoy)    Investment Period               12 Months
 Net revenue                 4,138        3,888            6.4     3,076          34.6
                                                                                          Stock Info
 EBITDA                        716          635           12.9       607          17.9
                                                                                          Sector                                     IT
 EBITDA margin (%)            17.3          16.3         99bp       19.8      (244)bp
                                                                                          Market Cap (` cr)                      35,763
 PAT                           468          400           17.0       344          36.1
                                                                                          Beta                                      0.9
 Source: Company, Angel Research
                                                                                          52 Week High / Low                 523/345
 For 3QFY2011, HCL Technologies (HCL Tech) reported strong numbers, way
                                                                                          Avg. Daily Volume                  225,881
 ahead of street but slightly below our expectations, shunning remote concerns
                                                                                          Face Value (`)                             2
 related to the IT demand environment that began surfacing post Infosys’ results.
                                                                                          BSE Sensex                             19,471
 HCL Tech has been a beneficiary of the return in demand for enterprise services,
 and we expect it to ride on the spending on discretionary services. The company is       Nifty                                   5,852

 expected to post a revenue (USD terms) and PAT CAGR of 25.6% and 31.9%,                  Reuters Code                       HCLT.BO
 respectively, over FY2010–13E, ahead of other tier-I companies. We maintain our          Bloomberg Code                    HCLT@IN
 Buy rating on the stock.
 Robust numbers: For 3QFY2011, HCL Tech reported revenue of US$914.5mn,                   Shareholding Pattern (%)
 up 5.8% qoq, on the back of 4.8% qoq volume growth and 1.0% qoq benefit due              Promoters                               64.8
 to cross-currency movement. EBIT margin also increased by 128bp qoq to 14.4%
                                                                                          MF / Banks / Indian Fls                  5.8
 on the back of 1) improvement in utilisation level, 2) lower SG&A investment and
                                                                                          FII / NRIs / OCBs                       21.6
 3) higher revenue productivity along with currency benefit.
                                                                                          Indian Public / Others                   7.8
 Outlook and valuation: Management is witnessing a strong demand environment
 and has signed 11 transformational deals in 3QFY2011 itself on the back of 17
 sign offs in 2QFY2011. We expect HCL Tech to be the outperformer among tier-I            Abs. (%)               3m        1yr      3yr
 IT companies, with a revenue (INR terms) CAGR of 23.7% over FY2010–13E on                Sensex                 2.2 11.5          18.1
 the back of its higher-value services portfolio. At the operating front, levers such     HCL Tech               2.1 51.4          94.2
 as 1) managing SG&A 2) expanding utilisations and 3) turnaround in the BPO
 segment are expected to improve margins. Thus, we expect EBITDA to grow at a
 19.6% CAGR over FY2010–13E. PAT, on the other hand, is expected to post a
 much higher CAGR of 31.9%, with improving profitability, forex gains on hedges
 and treasury gains. We maintain our Buy rating with a target price of `603.
 Key financials (Consolidated, US GAAP)
 Y/E June (` cr)             FY2009       FY2010      FY2011E     FY2012E     FY2013E
 Net sales                   10,630       12,564       16,103     19,627       23,565
 % chg                          39.2         18.2         28.2       21.9         20.1
 Net profit                   1,277        1,302         1,717      2,375       2,990
 % chg                          13.6          2.0         31.8       38.3         25.9
 EBITDA margin (%)              22.1         20.5         17.2       18.3         18.7
 EPS (`)                        18.8         18.9         24.7       34.2         43.0
 P/E (x)                        27.7         27.6         21.2       15.3         12.1    Srishti Anand
 P/BV (x)                          6.2        5.1           4.7       4.0          3.3    +91 22 3935 7800 Ext: 6820
 RoE (%)                        22.5         18.5         22.3       26.3         27.1    srishti.anand@angelbroking.com
 RoCE (%)                       14.9         15.3         15.5       18.2         19.1
                                                                                          Ankita Somani
 EV/Sales (x)                      3.5        2.9           2.3       1.8          1.4
                                                                                          +91 22 3935 7800 Ext: 6832
 EV/EBITDA (x)                  16.0         14.2         13.2        9.7          7.4
                                                                                          ankita.somani@angelbroking.com
 Source: Company, Angel Research


Please refer to important disclosures at the end of this report                                                                      1
                                                                                   HCL Technologies | 3QFY2011 Result Update



Exhibit 1: 3QFY2011 performance (Consolidated, US GAAP)
 Y/E June (` cr)            3QFY2011       2QFY2011       % chg (qoq)   3QFY2010     % chg (yoy)    9MFY2011    9MFY2010        % chg (yoy)
 Net revenue                       4,138      3,888              6.4       3,076           34.6       11,735           9,139           28.4
 Cost of revenue                   2,812      2,661              5.7       2,038           38.0        8,008           5,903           35.7
 Gross profit                      1,326      1,227              8.1       1,038           27.8        3,727           3,236           15.2
 SG&A expense                       610        592               2.9        430            41.7        1,772           1,301           36.2
 EBITDA                             716        635              12.9        607            17.9        1,954           1,935            1.0
 Dep. and amortisation              120        124              (3.1)       110             9.1         369             388           (4.9)
 EBIT                               596        511              16.7        497            19.9        1,586           1,547            2.5
 Other income                        13          5                          (14)                         19             (34)
 PBT                                609        516              18.0        483            26.0        1,604           1,513            6.0
 Income tax                         130        103              26.1         77            69.1         316             215            46.7
 PAT                                479        413              16.0        406            17.9        1,289           1,299          (0.8)
 Forex loss                         (11)       (13)            (16.4)       (63)         (82.1)         (90)           (339)         (73.4)
 Adjusted PAT                       468        400              17.0        344            36.1        1,199            961            24.8
 EPS                                 6.7        5.8             17.0         5.0           35.1         17.3            14.0           23.6
 Gross margin (%)                   32.0       31.6            49bp         33.7       (170)bp          31.8            35.4       (365)bp
 EBITDA margin (%)                  17.3       16.3            99bp         19.8       (244)bp          16.7            21.2       (451)bp
 EBIT margin (%)                    14.4       13.1           128bp         16.2       (176)bp          13.5            16.9       (341)bp
 PAT margin (%)                     11.3       10.3           101bp         11.2           4bp          10.2            10.5        (35)bp
 Source: Company, Angel Research



                                                Exhibit 2: 3QFY2011 – Actual vs. Angel estimates
                                                 (` cr)                                    Actual          Estimate            Variation (%)
                                                 Net revenue                               4,138               4,186                  (1.1)
                                                 EBITDA margin (%)                          17.3                18.6               (132)bp
                                                 PAT                                         468                502                   (6.8)
                                                 Source: Company, Angel Research

                                                Growth momentum continues
                                                For 3QFY2011, HCL Tech reported robust set of numbers. Revenue in USD terms
                                                came in at US$914.5mn, up 5.8% qoq. Growth was on the back of 4.8% qoq
                                                volume growth and 1.0% qoq benefit because of cross-currency movement derived
                                                due to USD depreciation of 1.3%, 0.6% and 1.8% qoq as against the GBP, Euro
                                                and AUD, respectively. The company also reported a 1.4% qoq increase in price
                                                realisations offshore and 1.0% qoq onsite. In constant currency (CC) terms,
                                                revenue grew by 4.8% qoq to US$906.0mn. Growth again proved to be
                                                broad-based, spanning across verticals, geographies and service lines.

                                                HCL Tech’s revenue growth was led by modest volume growth of 4.9% in core
                                                software services and strong USD revenue growth of 7.7% qoq (CC terms) in
                                                infrastructure services. Volume growth of 4.9% qoq in core software services was
                                                led by strong volume growth of 5.6% qoq offshore. Onsite volumes grew decently
                                                by 3.0% qoq in 3QFY2011.




April 20, 2011                                                                                                                            2
                                                   HCL Technologies | 3QFY2011 Result Update



                 Exhibit 3: Volume growth trend (Effort wise)
                       12                         10.9
                                               10.3 10.5
                       10
                             8.2                            7.9         7.9
                        8                7.2                      7.7         7.1         6.7
                                                                                                5.6
                        6                                                           5.6




                 (%)
                                                                                                            4.9
                                   4.6
                        4                                                                             3.0

                        2

                        0
                              3QFY10            4QFY10      1QFY11            2QFY11            3QFY11

                                                 Offshore          Onsite             Total

                 Source: Company, Angel Research

                 In INR terms, revenue came in at `4,138.2cr, up 6.4% qoq, reporting higher
                 growth as compared to USD revenue growth due to the 1.0% qoq depreciation in
                 INR against USD in 3QFY2011.

                 Core software continues its growth momentum: During the quarter, core software
                 services posted robust 5.4% qoq revenue growth (USD terms) to US$650.9mn on
                 the back of strong USD revenue growth of 5.7% and 5.1% qoq (CC terms) in
                 enterprise application services (EAS) (contributed 21.4% to revenue) and custom
                 application services (contributed 32.0% to revenue).

                 Among other core software services, growth of 1.6% qoq (CC terms) was witnessed
                 in engineering and R&D services (ERD) (contributed 17.7% to revenue). This growth
                 was slightly muted on account of disruption in delivery due to the mishap in Japan.

                 Infrastructure services led to strong growth: The infrastructure services segment
                 reported whopping 8.5% qoq growth in revenue (USD terms) to US$213.7mn on
                 the back of strong 7.7% qoq growth (CC terms) in infrastructure management
                 services (IMS), contributing 23.4% to revenue; and cross-currency benefit of 0.8%.
                 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. A large part of the deal flow is from existing
                 clients due to contract renewals.

                 BPO declines: The BPO segment has returned to its growth path since the last
                 couple of quarters, with revenue of US$49.8mn, up 0.7% qoq. However, in CC
                 terms, the segment reported a 1.0% qoq decline. The demand environment is
                 heating up as clients are looking at globalisation 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 and has already made platforms for the insurance, logistics, telecom and
                 MPE verticals. Also, HCL Tech has acquired certain software assets from Citibank
                 International Plc; this has provided the company a platform to cater to the capital
                 market vertical. The company is expected to invest US$5mn–6mn every quarter in
                 BPO services until CY2011.



April 20, 2011                                                                                                    3
                                                   HCL Technologies | 3QFY2011 Result Update



                 Exhibit 4: 3QFY2011 performance (Segment wise)
                 (US$ mn)                     3QFY11        2QFY11 % chg qoq         3QFY10         % chg yoy
                 SOFTWARE SERVICES
                   Revenue                          651         618            5.4        481            35.2
                   Gross profit                     225         210            7.0        180            25.1
                   Gross margin (%)                34.5         34.0         53bp         37.3       (280)bp
                   EBITDA                           119         108          10.5         110              8.7
                   EBITDA margin (%)               18.3         17.5         85bp         22.8       (447)bp
                   EBIT                             103           90         13.8           93           10.2
                   EBIT margin (%)                 15.8         14.6        117bp         19.4       (359)bp


                 INFRASTRUCTURE SERVICES
                   Revenue                          214         197            8.5        152            40.8
                   Gross profit                      59           53         11.3           42           40.4
                   Gross margin (%)                27.7         27.0         69bp         27.7          (8)bp
                   EBITDA                            41           36         14.6           28           45.9
                   EBITDA margin (%)               19.0         18.0        102bp         18.4           67bp
                   EBIT                              34           29         17.1           23           48.2
                   EBIT margin (%)                 15.7         14.5        115bp         14.9           79bp


                 BPO SERVICES
                   Revenue                           50           50           0.7          52           (4.2)
                   Gross profit                       9           10         (3.1)          10           (1.1)
                   Gross margin (%)                18.9         19.6        (74)bp        18.3           59bp
                   EBITDA                            (2)          (2)       (33.3)          (2)         (30.4)
                   EBITDA margin (%)               (3.2)       (4.8)        164bp         (4.4)         121bp
                   EBIT                              (5)          (5)       (16.7)          (5)         (10.0)
                   EBIT margin (%)                 (9.0)      (10.9)        188bp         (9.6)          59bp
                 Source: Company, Angel Research



                 Exhibit 5: Revenue growth trend (Service wise in CC terms)
                        20

                        15

                        10

                          5
                  (%)




                          0

                         (5)
                                  3QFY10      4QFY10          1QFY11            2QFY11            3QFY11
                        (10)

                        (15)
                                      EAS   ERD        Custom application      IMS       BPO services

                 Source: Company, Angel Research




April 20, 2011                                                                                               4
                                                   HCL Technologies | 3QFY2011 Result Update



                 HCL Tech’s anchor verticals, financial services (contributed 26.2% to revenue) and
                 manufacturing (contributed 27.3% to revenue) continued their growth momentum
                 as the company’s primary growth drivers, up by 10.5% and 6.1% qoq (CC terms),
                 respectively. In the financial services space, M&A consolidation work continued to
                 drive growth, especially in Europe and Asia Pacific region. Demand in the
                 manufacturing space is coming for business needs related to operational
                 efficiency, cost reduction and product development. In addition, the energy, utilities
                 and public sector (EPU) vertical (contributed 7.3% to revenue) grew strongly by
                 6.3% qoq (CC terms). This vertical is gaining strong demand from North America,
                 especially for smart grid platforms. Other verticals, such as media, publishing and
                 entertainment (MPE) (contributed 6.6% to revenue) and healthcare (contributed
                 8.0% to revenue) also posted moderate growth of 1.7% and 0.5% qoq (CC terms),
                 respectively. However, the retail and consumer product group (CPG) vertical
                 (contributed 8.7% to revenue) and the telecom vertical (contributed 10.3% to
                 revenue), which posted 14.2% and 5.0% qoq (CC terms) growth in 2QFY2011,
                 declined by 0.4% and 0.3% qoq (CC terms), respectively, in 3QFY2011.
                 Management has indicated that the retail vertical will rebound from the next
                 quarter, but telecom will continue to witness some systemic softness in IT spending.


                 Exhibit 6: Revenue growth trend (Industry wise in CC terms)
                 Growth by vertical (%)    3QFY10        4QFY10 1QFY11          2QFY11        3QFY11
                 Financial services                5.5       8.3        7.2          3.3         10.5
                 Manufacturing                 10.5         10.4        7.9          6.7           6.1
                 Telecom                           0.4       2.9        7.2          5.0         (0.3)
                 Retail and CPG                    1.0      19.6      11.2          14.2         (0.4)
                 MPE                           16.3          1.5        1.3          6.0           1.7
                 Healthcare                    10.2         19.3      10.5           7.1           0.5
                 EPU                               1.8       6.8        6.5         12.3           6.3
                 Others                        10.3          5.7        4.5          4.8           1.3
                 Source: Company, Angel Research


                 During the quarter, HCL Tech reported growth across all geographies. North
                 America and Europe grew by 0.7% qoq and 4.2% qoq (CC terms), respectively,
                 while rest of the world posted whopping growth of 20.5% qoq (CC terms).




April 20, 2011                                                                                       5
                                                   HCL Technologies | 3QFY2011 Result Update



                 Exhibit 7: Revenue growth trend (Geography wise in CC terms)
                        22
                                                                                                 20.5

                        18                                     16.7

                        14                         11.3                     10.8
                                  9.6                          13.4




                  (%)
                        10

                                                   9.1                        5.8
                         6        7.9                                                          4.2
                                                               2.8
                                                     4.2
                         2                                                                     0.7
                                     1.4
                        (2)    3QFY10         4QFY10         1QFY11       2QFY11           3QFY11

                                            US             Europe          Rest of the world

                 Source: Company, Angel Research

                 Hiring spree continues, utilisations inch up
                 During the quarter, HCL Tech added 7,534 gross employees, out of which 5,984
                 were lateral additions. The company added 1,153 net employees, taking its total
                 employee base to 73,420.

                 In the core software services segment, 2,939 gross and 867 net employees were
                 added during the quarter, taking the segment’s total employee base to 47,802.
                 Gross lateral employee addition in this segment stood robust at 1,991, which
                 indicates that the company is witnessing a strong deal pipeline for transformational
                 projects. Attrition rate for the core software services segment declined by 30bp qoq
                 to 16.8% (LTM basis) during the quarter.

                 The infrastructure services segment, which has been growing at a scorching pace
                 since the last few quarters, reported net addition of 750 employees in 3QFY2011,
                 taking the segment’s total employee base to 14,734. Gross addition in the
                 segment stood at 1,468 employees, out of which 1,466 were laterals. Attrition rate
                 for this segment inched up by 10bp qoq to17.6% (LTM basis).

                 The BPO segment again witnessed employee rationalisation in 3QFY2011,
                 reporting a reduction of 464 net employees, taking the segment’s total employee
                 base to 10,884. However, the company added 3,127 gross employees in the BPO
                 segment during the quarter. The quarterly offshore attrition rate for this segment
                 grew by 20bp to 11.0% during the quarter.




April 20, 2011                                                                                          6
                                                     HCL Technologies | 3QFY2011 Result Update



                 Exhibit 8: Hiring trend (Net addition, Service wise)
                                                3QFY10           4QFY10     1QFY11        2QFY11         3QFY11
                 Net additions
                 Software services                 2,714          4,944        4,347           1,475            867
                 Infrastructure services             438            465          980            784             750
                 BPO                               (711)          1,019          334           (210)           (464)
                 Total employees
                 Software services               36,169          41,113      45,460           46,935      47,802
                 Infrastructure services         11,755          12,220      13,200           13,984      14,734
                 BPO                             10,205          11,224      11,558           11,348      10,884
                 Source: Company, Angel Research

                 Utilisation, onsite and offshore-excluding trainees, increased by 60bp and 130bp
                 qoq to 96.5% and 76.3%, respectively. Utilisation level improved as the company
                 hired laterals to address assignments and as freshers hired in 1HFY2011 started
                 getting billed. Utilisation level, offshore-including trainees, also improved by
                 180bp qoq to 71.9%.

                 The company is trying to improve its utilisation level (including trainees) further to
                 74–75%, which can be an important lever to improve margins.

                 Exhibit 9: Utilisation trend (%)
                        100


                                   95.6              95.2            95.7              95.9             96.5
                        90

                                   79.0
                        80                           77.0                                               76.3
                  (%)




                                                                     74.1              75.0

                                   76.2
                        70                           72.9                                               71.9
                                                                     70.1              70.1

                        60
                                 3QFY10            4QFY10           1QFY11          2QFY11             3QFY11

                                 Offshore - Including trainees       Offshore - Excluding trainees       Onsite

                 Source: Company, Angel Research

                 EBIT margin enhances
                 During 3QFY2011, HCL Tech’s EBITDA and EBIT margins increased by 99bp and
                 128bp qoq to 17.3% and 14.4%, respectively. The improvement in EBIT margin
                 was on account of 1) improvement in utilisation level, 2) lower SG&A investment
                 and 3) higher productivity.

                 EBIT margin growth was because of 48bp positive effect derived on account of
                 operational efficiency, including higher utilisation, 45bp positive impact due to
                 SG&A optimisation in addition to 36bp positive impact from INR depreciation
                 against USD qoq.




April 20, 2011                                                                                                     7
                                                   HCL Technologies | 3QFY2011 Result Update



                 Exhibit 10: Margin profile
                         35       33.7             33.1
                                                             31.6             31.6              32.0

                         30

                         25




                  (%)
                                  19.8
                                                   18.6
                         20                                                                     17.3
                                                             16.3             16.3

                         15
                                  16.2
                                                   15.3                          13.1           14.4
                                                              12.9
                         10
                                3QFY10          4QFY10      1QFY11           2QFY11           3QFY11

                                            Gross margin     EBITDA margin            EBIT margin

                 Source: Company, Angel Research

                 HCL Tech has been expanding its margins since the last two quarters and
                 management has again guided for margin expansion of 100–120bp in the next
                 quarter as well.

                 Segment wise, EBIT margin for core software services and infrastructure services
                 increased by 117bp and 115bp qoq to 15.8% and 15.7%, respectively, in
                 3QFY2011. However, the BPO segment, which has managed to pull up its gross
                 margin since the last two quarters, posted a 74bp qoq decline in gross margins to
                 18.9%. However, at the EBITDA and EBIT level, the segment trimmed down its
                 losses with margins improving by 164bp and 188bp qoq, respectively.

                 Exhibit 11: BPO segment – Margin trend
                        24                                                    19.5             18.9
                                 18.3                        18.1
                        18
                                                  12.4
                        12

                          6

                          0
                 (%)




                                 (4.3)                                                              (3.2)
                                                                              (4.9)
                         (6)                                   (8.7)
                                                 (11.4)
                               (9.6)                                                                 (9.1)
                        (12)
                                                                                (11.0)
                                                 (14.3)        (14.8)
                        (18)
                               3QFY10           4QFY10      1QFY11           2QFY11          3QFY11

                                         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 new
                 clients. The company added one client in the US$50mn–100mn bracket, two
                 clients in the US$30mn–40mn bracket, three clients in the US$5mn–10mn bracket
                 and six clients in the US$1mn–5mn bracket. Client addition stood tall at 58. Active
                 client base of the company increased to 453 in 3QFY2011 from 434 in
                 2QFY2011. The company’s top clients also registered decent growth, with the



April 20, 2011                                                                                               8
                                                   HCL Technologies | 3QFY2011 Result Update



                 top 5, top 10 and top 20 clients growing by 4.1%, 6.0% and 6.2% qoq
                 (LTM basis), respectively.

                 The company won 11 transformational deals in 3QFY2011. These deals span
                 across all services lines and verticals. Eight of these deals have been won from
                 existing customers. Also, three of these deals are business services-based deals.

                 Exhibit 12: Client pyramid
                  Particulars                       3QFY10 4QFY10      1QFY11      2QFY11      3QFY11
                 Active client relationship            404      408         426         434        453
                 New client relationship                39       51          48          46         58
                 US$1mn–5mn                            175      176         180         199        205
                 US$5mn–10mn                            51       49          48          46         49
                 US$10mn–20mn                           33       34          38          39         39
                 US$20mn–30mn                           12       12          12          12         12
                 US$30mn–40mn                            3        5           7           7           9
                 US$40mn–50mn                            2        2           1           2           2
                 US$50mn–100mn                           4        4           5           6           7
                 US$100mn plus                           1        1           1           1           1
                 Source: Company, Angel Research


                 Outlook and valuation
                 HCL Tech has recorded a 7.3% CQGR in revenue over the past four quarters. This
                 is primarily on the back of discretionary services such as EAS and custom
                 applications coming back strongly for the company, recording a CQGR of 7.6%
                 and 9.3% over JFM2010–11, respectively. In addition, the company’s anchor
                 service line infrastructure services maintained its growth momentum at an 8.9%
                 CQGR. Verticals such as financial services, manufacturing and EPU have proved to
                 be the growth drivers for the company. Also, geography wise, continental Europe
                 has proved to be a strong spender for the company vis-à-vis its peers because of a
                 strong footprint gained in this geography post the acquisition of Axon.

                 Management is witnessing a strong demand environment and has signed 11 large
                 deals in 3QFY2011 itself, most being transformational deals, on the back of 17
                 sign offs in 2QFY2011. Management cautioned that the deals are more short term
                 in nature and coming 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 strong client mining ability will
                 emerge as a front runner. We expect HCL Tech to be the outperformer among
                 tier-I IT companies, with a revenue (INR terms) CAGR of 23.3% over FY2010–13E,
                 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 utilisations and 3) turnaround in the BPO segment on top of strong
                 growth are expected to improve the company’s margins. Thus, we expect EBITDA
                 to grow at a 19.6% CAGR over FY2010–13E. PAT, on the other hand, is expected
                 to post a much higher CAGR of 31.9%, with improving profitability, forex gains on
                 hedges and treasury gains.




April 20, 2011                                                                                        9
                                                                   HCL Technologies | 3QFY2011 Result Update



                 At the CMP of `523, the stock is trading at 12.2x FY2013E EPS of `43.0.
                 The outperformance registered by the company warrants the discount to Infosys to
                 be bridged. Thus, we value the company at 14x FY2013E EPS i.e., at a discount of
                 33% to Infosys’ target multiple of 21x (vs. historical discount of 35–40%).
                 We maintain our Buy view on the stock with a target price of `603.


                 Exhibit 13: Key assumptions
                                                                                                            FY2012E                      FY2013E
                 Revenue growth (US$)                                                                              24.6                           21.0
                 USD-INR rate (realised)                                                                           44.3                           44.0
                 Revenue growth (INR)                                                                              21.9                           20.1
                 EBITDA margin (%)                                                                                 18.3                           18.6
                 EBIT margin (%)                                                                                   15.4                           15.8
                 Tax rate (%)                                                                                      24.0                           25.0
                 EPS growth (%)                                                                                    38.3                           25.9
                 Source: Company, Angel Research



                 Exhibit 14: Change in estimates
                                                               FY2012E                                                    FY2013E
                 Parameter                   Earlier               Revised      Variation            Earlier               Revised       Variation
                 (` cr)                  estimates             estimates                   (%)   estimates                estimates                   (%)
                 Net revenue               24,239                  19,627         (19.0)          24,239                   23,565                 (2.8)
                 EBITDA                      4,656                  3,594         (22.8)             4,656                  4,400                 (5.5)
                 Other income                       220                95         (56.9)                   220                242                 10.2
                 PBT                         4,102                  3,110         (24.2)             4,102                  3,970                 (3.2)
                 Tax                         1,025                   747          (27.2)             1,025                    993                 (3.2)
                 PAT                         3,076                  2,375         (22.8)             3,076                  2,990                 (2.8)
                 Source: Company, Angel Research


                 Exhibit 15: One-year forward PE (x) chart
                        750
                        650
                        550
                        450
                  (`)




                        350
                        250
                        150
                          50
                                                                                                                                        Dec-10
                               Aug-07




                                                                                  Apr-09




                                                                                                                               Jul-10
                                                                                                                 Feb-10
                                                                       Nov-08




                                                                                                 Sep-09
                                                          Jun-08
                                           Jan-08




                                        Price                  19x              16x                       13x                10x                 6x

                 Source: Company, Angel Research




April 20, 2011                                                                                                                                        10
                                                                                  HCL Technologies | 3QFY2011 Result Update




Exhibit 16: Recommendation summary
 Company                Reco.         CMP Tgt. price Upside     FY2013E P/BV    FY2013E P/E FY2011-13E    FY2013E RoCE FY2013E RoE
                                       (`)       (`)     (%)              (x)           (x)   EPS CAGR             (%)         (%)
 3iInfotech             Buy            46        55     20.0             0.5           2.8        21.5            14.6        18.6
 Educomp                Accumulate    465       522     12.2             1.5           9.0        17.7            16.4        17.0
 Everonn                Reduce        689       602    (12.6)            3.3          16.3        27.7            15.5        16.7
 HCL Tech               Buy           523       603     15.3             3.3          12.1        32.0            19.1        27.1
 Infosys                Buy          2,906    3,435     18.2             4.1          17.8        17.0            24.5        23.0
 Infotech Enterprises   Neutral       156          -        -            1.3           9.6        13.5            15.1        13.3
 KPIT Cummins           Accumulate    165       189     14.8             1.6           9.2        23.9            22.5        18.7
 Mphasis                Buy           459       537     17.0             1.6           9.4         6.9            17.5        17.4
 NIIT                   Buy            54        69     27.9             1.3           6.9        26.2            12.3        18.5
 TCS                    Accumulate   1,219    1,274      4.5             6.3          20.1        16.7            29.3        31.2
 Tech Mahindra          Accumulate    723       796     10.1             1.9          12.8        (0.3)           16.0        14.9
 Wipro                  Accumulate    464       510      9.9             3.2          15.3        17.7            16.9        21.0
 Source: Company, Angel Research




April 20, 2011                                                                                                                  11
                                            HCL Technologies | 3QFY2011 Result Update



                 Profit and loss statement (Consolidated, US GAAP)
                 Y/E June (` cr)            FY2009   FY2010   FY2011E    FY2012E   FY2013E
                 Net sales                  10,630   12,564   16,103     19,627    23,565
                 Cost of revenues            6,625    8,196   10,927     13,483    16,498
                 Gross profit                4,005    4,369     5,176      6,144     7,066
                 % of net sales               37.7     34.8      32.1       31.3      30.0
                 SG&A expenses               1,661    1,796     2,410      2,550     2,666
                 % of net sales               15.6     14.3      15.0       13.0      11.3
                 EBITDA                      2,345    2,573     2,766      3,594     4,400
                 % of net sales               22.1     20.5      17.2       18.3      18.7
                 Dep. and amortization        449      501       500        578       672
                 % of net sales                4.2      4.0       3.1        2.9       2.9
                 EBIT                        1,895    2,072     2,266      3,016     3,728
                 % of net sales               17.8     16.5      14.1       15.4      15.8
                 Other income, net            164      (55)       26         95       242
                 Profit before tax           2,058    2,017     2,292      3,110     3,970
                 Provision for tax            254      240       487        747       993
                 % of PBT                     12.4     11.9      21.3       24.0      25.0
                 PAT                         1,803    1,777     1,804      2,364     2,978
                 Share from equity invst.       3        1           -         -         -
                 Forex loss                  (530)    (476)      (88)        11        12
                 Adj. net profit             1,277    1,302     1,717      2,375     2,990
                 EPS (`)                      18.8     18.9      24.7       34.2      43.0




April 20, 2011                                                                         12
                                                     HCL Technologies | 3QFY2011 Result Update



                 Balance sheet (Consolidated, US GAAP)
                 Y/E June (` cr)                             FY2009   FY2010 FY2011E FY2012E FY2013E
                 Cash and cash equivalent                      420      469      497      570      651
                 Account receivables, net                     2,708    3,050    3,441    3,925    4,519
                 Deposit with banks                           1,456    1,091    1,298    1,982    3,445
                 Deposit (one year with HDFC ltd)                 -     100      160      150      200
                 Investment securities, available for sale      23      782      300      721     1,148
                 Other current assets                         1,070     885     1,256    1,472    1,767
                 Total current assets                         5,678    6,376    6,952    8,820   11,731
                 Property and equipment, net                  1,586    1,849    2,200    2,495    2,692
                 Intangible assets, net                       4,533    4,312    4,310    4,237    4,168
                 Investment securities HTM                      20       50      100      100      100
                 Investment in equity investee                  17       21       21       24       20
                 Other assets                                  861      964     1,000     881      772
                 Total assets                                12,694   13,572   14,583   16,557   19,483
                 Current liabilities                          3,268    3,133    3,551    4,449    5,445
                 Borrowings                                   2,977    2,663    2,476    1,998    1,708
                 Other liabilities                             763      739      852     1,068    1,307
                 Total liabilities                            7,008    6,535    6,880    7,515    8,459
                 Minority Interest                                -        -        -        -        -
                 Total stockholder equity                     5,686    7,037    7,703    9,042   11,024
                 Total liabilities and stock holder equity   12,694   13,572   14,583   16,557   19,483




April 20, 2011                                                                                      13
                                                    HCL Technologies | 3QFY2011 Result Update



                 Cash flow statement (Consolidated, US GAAP)
                 Y/E June (` cr)                       FY2009    FY2010    FY2011E   FY2012E FY2013E
                 Pre tax profit from operations         1,893     2,072      2,266     3,016    3,728
                 Depreciation                             449       501       500       578       672
                 Expenses (deferred)/written off         (573)    (564)      (176)      (63)      (34)
                 Pre tax cash from operations           1,770     2,009      2,590     3,531    4,366
                 Other income/prior period ad             164       (55)       26        95       242
                 Net cash from operations               1,934     1,954      2,616     3,625    4,609
                 Tax                                     (254)    (240)      (487)     (747)    (993)
                 Cash profits                           1,680     1,714      2,128     2,879    3,616
                 (Inc)/dec in current assets           (1,429)    (156)      (763)     (700)    (889)
                 Inc/(dec) in current liabilities       1,497     (135)       418       898       995
                 Net trade working capital                 67     (291)      (345)      198       106
                 Cash flow from oper. actv.             1,747     1,424      1,783     3,076    3,722
                 (Inc)/dec in fixed assets               (609)    (652)      (785)     (800)    (800)
                 (Inc)/dec in intangibles              (3,669)      109       (64)        0         0
                 (Inc)/dec in investments                 491     (528)       165    (1,097)   (1,938)
                 (Inc)/dec in minority interest            (6)         -         -         -         -
                 (Inc)/dec in non-current liab.           168       (25)      114       215       239
                 (Inc)/dec in non-current assets         (355)    (103)       (36)      119       110
                 Cash flow from invest. actv.          (3,980)   (1,199)     (607)   (1,563)   (2,389)
                 Inc/(dec) in debt                      2,950     (314)      (187)     (478)    (290)
                 Inc/(dec) in equity/premium             (145)      778         0         0         0
                 Dividends                               (617)    (640)      (962)     (962)    (962)
                 Cash flow from financing actv.         2,188     (176)    (1,149)   (1,440)   (1,252)
                 Cash generated/(utilised)                (44)       48        28        73        81
                 Cash at start of the year                465       420       469       497       570
                 Cash at end of the year                  420       469       497       570       651




April 20, 2011                                                                                     14
                                                       HCL Technologies | 3QFY2011 Result Update



                 Key ratios
                 Y/E June                                 FY2009   FY2010   FY2011E   FY2012E   FY2013E
                 Valuation ratio (x)
                 P/E (on FDEPS)                             27.7     27.6      21.2      15.3      12.1
                 P/CEPS                                     20.5     20.0      16.4      12.3       9.9
                 P/BVPS                                      6.2      5.1       4.7       4.0       3.3
                 Dividend yield (%)                          1.5      1.5       1.5       1.5       1.7
                 EV/Sales                                    3.5      2.9       2.3       1.8       1.4
                 EV/EBITDA                                  16.0     14.2      13.2       9.7       7.4
                 EV/Total assets                             2.9      2.7       2.5       2.1       1.7
                 Per share data (`)
                 EPS (Fully diluted)                        18.8     18.9      24.7      34.2      43.0
                 Cash EPS                                   25.5     26.2      31.9      42.5      52.7
                 Dividend                                    8.0      8.0       8.0       8.0       9.0
                 Book value                                 83.9    102.2     110.8     130.1     158.6
                 Dupont analysis
                 Tax retention ratio (PAT/PBT)               0.9      0.9       0.8       0.8       0.8
                 Cost of debt (PBT/EBIT)                     1.1      1.0       1.0       1.0       1.1
                 EBIT margin (EBIT/Sales)                    0.2      0.2       0.1       0.2       0.2
                 Asset turnover ratio (Sales/Assets)         0.8      0.9       1.1       1.2       1.2
                 Leverage ratio (Assets/Equity)              2.2      1.9       1.9       1.8       1.8
                 Operating ROE                              31.7     25.2      23.4      26.1      27.0
                 Return ratios (%)
                 RoCE (pre-tax)                             14.9     15.3      15.5      18.2      19.1
                 Angel RoIC                                 17.6     18.7      18.5      23.1      26.7
                 RoE                                        22.5     18.5      22.3      26.3      27.1
                 Turnover ratios (x)
                 Asset turnover (fixed assets)               2.2      1.8       2.2       2.6       3.0
                 Receivables days                             79      84        78        73        70




April 20, 2011                                                                                      15
                                                                                    HCL Technologies | 3QFY2011 Result Update




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

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  Disclosure of Interest Statement                                                HCL Tech
  1. Analyst ownership of the stock                                                  No
  2. Angel and its Group companies ownership of the stock                            Yes
  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 20, 2011                                                                                                                             16

				
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