Company Report | Q1FY12 Result Update

LONG TERM INVESTMENT CALL

19 October 2011 Industry CMP (INR) Target (INR) Upside / Downside (%) 52 week High/Low (INR) Market Cap (INR bn) 3M Avg. Daily Volumes P/E (FY12 E) Shareholding Pattern (%)
Others 8%

BUY

IT / ITES 401 495 23.4% 528/360 27.67 1339.69 12.6x

Wage hikes impact margins, but top line remains strong

HCL Technologies Ltd. (HCLT) reported mixed results for the first quarter of the year. The company revenue crossed the USD 1 bn mark for the quarter for the first time. The quarterly revenue has doubled over the last three years. Volume Growth: HCLT reported revenue of INR 46.51 bn which was up by 25% and 8.2% on a YoY and a QoQ basis respectively. EBITDA for the quarter stood at INR 7.9 bn, up 32% from the same quarter in the previous year. PAT posted for the quarter was INR 4.9 bn, up 50% YoY but marginally down by -2.7% QoQ. HCLT saw volume growth of 5.1% this quarter. Price realization increased 1.2% QoQ. Offshore revenue stood at 41.7%, and Onsite revenue stood at 58.3%. Utilization excluding trainees was at 74.1%. If we include trainees, utilization was at 70.1%. HCLT added 3,474 employees (net) in this quarter, taking the total employee base to 80,520. New deals in the quarter: HCLT has seen 12 new wins for the quarter

FIIs 21%

DIIs 6%

Promoters 65%

1 Year Stock Chart

130 120 110 100 90 80 70 60 Dec Aug Nov May Feb Mar Apr Sep Jan Jun Jul Oct Oct HCL Nifty

with the US and Europe driving the growth. The quarter saw strong growth across the service lines with Engineering and R&D Services growing by 8.6% and Customer Applications and Infrastructure Services growing at 7.3% and 5.8% respectively. The Retail & CPG and the Manufacturing verticals also showed good growth of 12% and 8.2% respectively. In constant currency terms the BFSI segment grew by 2.1% QoQ, whereas the Telecom segment contracted by 2% QoQ. The EBIT margins saw a decline in this quarter, by 120 bps to 14.3% but have been less than projected by the company. Positive growth outlook: HCLT is confident of acquiring greater market

Stock Performance (%) 1 Month 14.1% 0.7% 3 Months -11.6% -8.3% 1 Year 2.0% -15.6%
(INR in mn)

share in the quarters moving ahead and is well positioned to do this. The IT services space has seen an increase in churn rates at 50% QoQ and with new long term contracts of peer companies coming up for renewal in the second quarter, HCLT is looking to capitalize using their operation efficiency and better pricing model. Although there are global macro economic concerns, HCLT did not witness any considerable slowdown in demand over the last quarter and financial services continue to look strong. The next quarter will be extremely important for the company as it looks to win important deals in the quarter which will have a significant impact on the financial year moving ahead. HCLT expects strong revenue growth in orders in the October-December quarter as it taps new markets in Japan and Europe and seeks to benefit from contract renewals due in the U.S.

HCLT NIFTY

Particulars Total Income EBIDTA Reported PAT

Actual 46,513 7949 4,968

Estimates 45,623 7,789 5,247

* Source: Bloomberg, Unicon Research

Wealth Research, Unicon Financial Intermediaries. Pvt Ltd. Email: wealthresearch@unicon.in

Outlook & Valuation:

The macro economic environment will have a significant impact on the future revenue of IT services companies in the medium term. HCLT has adopted a fairly aggressive strategy in increasing its market share and thus has been able to show greater volume growth as compared to its peer. This growth momentum may moderate to a certain extent moving forward but the company will still show strong revenues due to increased market share. They are in the best position to benefit from the depreciation of the INR v/s USD due to their low forex hedged position (~ USD 390 mn) as compared to their peers. At CMP of INR 401, the stock is trading at P/E of 12.6x FY12E earnings which is at a discount as compared to its peers. We believe the stock has a potential upside of 23.4% and hence recommend a BUY on the stock and maintain our price target of INR 495.

Consolidated Financials
(INR in mn)

Particulars Revenues Direct Costs Gross Profits Gross Profit Margin SG&A EBITDA EBITDA (%) Depreciation Amortisation EBIT EBIT (%) Foreign Exchange Gains/(Loss) Other Income Share of Income/(loss) of minority shareholders Tax Provision Tax Rate (%) PAT PAT Margin Diluted EPS (INR)
Source: Company, Unicon Research (Average Exchange Rate USD 1 = INR 46.41)

Q1 FY12 46,513.0 31,871.0 14,642.0 31.5% 6693.0 7949.0 17.1% 1,178.0 131.0 6,640.0 14.3% (179.0) 238.0 3.0 1,728.0 24.5% 4,968.00 10.7% 6.8

Q1 FY11 37,081.0 25,346.0 11,735.0 31.6% 5701.0 6034.0 16.3% 1,064.0 185.0 4,785.0 12.9% (655.0) 5.0 (2.0) 824.0 15.1% 3,313.00 8.9% 4.8

Y-o-Y 25% 26% 25% -17 bps 17% 32% 82 bps 11% -29% 39% 137 bps -73% 4660% -250% 110% 935 bps 50% 175 bps 42%

Q4 FY11 42,995.0 29,061.0 13,934.0 32.4% 5992.0 7942.0 18.5% 1,121.0 167.0 6,654.0 15.5% 83.0 71.0 2.0 1,699.0 25.6% 5,107.00 11.9% 7.0

Q-o-Q 8% 10% 5% -93 bps 12% 0% -138 bps 5% -22% -0.2% -120 bps -316% 235% 50% 2% -109 bps -3% -120 bps -2.9%

Wealth Research, Unicon Financial Intermediaries. Pvt Ltd. Email: wealthresearch@unicon.in

Unicon Investment Ranking Methodology

Rating Return Range Buy >= 20% Accumulate 10% to 20% Hold -10% to 10% Reduce -10% to -20% Sell <= -20%

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Wealth Research, Unicon Financial Intermediaries. Pvt Ltd. Email: wealthresearch@unicon.in