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1、,703.30,765.00,1.7,Company report,Telecoms,Media&TechnologyIT ServicesEquity India,abcGlobal Research,HCL Technologies(HCLT IN),NeutralTargetprice(INR)Share price(INR)Forecast dividend yield(%)Potential return(%),10.5,N:2Q13 Strong positive surprise on margins 2Q margin expansion was noteworthy and
2、may influencesignificant consensus upgrades.But we see partial marginreversal in the coming quarters.,Note:Potential return equals the percentagedifference between the current share price andthe target price,plus the forecast dividend yield,Further,growth remains polarised towards IMS and continuedt
3、o trend downwards and may restrict further re-rating,Jun,2012 a 2013 e,2014 e,HSBC EPSHSBC PEPerformanceAbsolute(%)Relative(%),36.0519.51M11.17.1,52.3313.43M21.112.9,54.6612.912M65.336.4,Remain Neutral,but raise our target to INR765(from INR610)HCLT surprised positively with 40bps expansion in margi
4、ns(versus a 140 bps decline,Note:(V)=volatile(please see disclosure appendix)17 January 2013Yogesh Aggarwal*AnalystHSBC Securities and Capital Markets(India)Private Limited+9122 2268 1246yogeshaggarwalhsbc.co.inView HSBC Global Research at:http:/*Employed by a non-US affiliate ofHSBC Securities(USA)
5、Inc,and is notregistered/qualified pursuant to FINRAregulationsIssuer of report:HSBC Securities andCapital Markets(India)Private LimitedDisclaimer&DisclosuresThis report must be readwith the disclosures andthe analyst certifications inthe Disclosure appendix,and with the Disclaimer,which forms part
6、of it,expected).The key highlight of the result was an upgrade of margin guidance by the companyto 18-19%(EBIT)from the earlier 16%.We raise our margin estimates as well,but only partially and expect 200bps margincompression in FY14(from the 2Q13 level):Headcount increase in the core softwarebusines
7、s has consistently lagged the volume growth in the past four quarters(refer chart 2)andgoing forward headcount increase should precede volume growth in our view,therebyimpacting margins.Furthermore,increasing competitive intensity in the IMS space and scale-up of large deals may exert margin pressur
8、e in the coming quarters.We therefore build in a200bps margin decline in FY14,although still better than our previous estimates,leading to17%earnings upgrade.Growth remains polarised towards IMS:In our report,India IT Services The next bigthing,3 December 2012,we highlighted the significant opportun
9、ity in the IMS market andHCLT in the forefront of that.However,the weakness in the Core IT services business(c70%to the total business)still persists with growth slowing down to 5%y-o-y now(refer chart 1).While the extraordinary strength in the IMS market has overshadowed the weakness in rest ofthe
10、business,increased competition from peers in the IMS space may strengthen headwinds forHCLT.Our growth estimates for the core software business remains lower than rest of theindustry(refer chart 3).Investment thesis:Overall,we believe the long-term fundamentals of the company arerobust,but the stock
11、 may undergo volatility in the near term as IT spending recoveryremains patchy or margin compression starts in earnest.We therefore look for corrections tobe more constructive on the stock.Valuation:We revise our FY14e EPS by+17%to factorin the better margin outlook and roll over our valuation targe
12、t to FY14e EPS(from Mar-2014e)to arrive at a target price of INR765(from INR610)and remain Neutral.We are 7%above consensus.Index BOMBAY SE IDX Enterprise value(INRm)445841Index level 19,964 Free float(%)23RIC HCLT.BO Market cap(USDm)8,935Bloomberg HCLT IN Market cap(INRm)488,668Source:HSBC Source:H
13、SBC,HCL Technologies(HCLT IN)IT Services17 January 2013Financials&valuationFinancial statements,Valuation data,abc,Year to,06/2012a,06/2013e,06/2014e,06/2015e,Year to,06/2012a,06/2013e,06/2014e,06/2015e,Profit&loss summary(INRm),EV/sales,2.2,1.7,1.5,1.3,RevenueEBITDADepreciation&amortisationOperatin
14、g profit/EBITNet interestPBT,210,31240,040-5,65334,38771933,262,256,42155,766-7,04048,72673148,473,284,20457,066-7,80949,2572,05250,706,314,56962,384-8,69553,6893,70656,792,EV/EBITDAEV/ICPE*P/Book valueFCF yield(%)Dividend yield(%),11.66.419.55.14.01.7,8.04.913.43.75.51.7,7.44.312.93.07.21.7,6.33.71
15、1.92.57.61.7,HSBC PBTTaxationNet profitHSBC net profit,33,262-8,15125,06125,061,48,473-11,51236,96136,961,50,706-11,15539,55139,551,56,792-13,96142,83142,831,Note:*=Based on HSBC EPS(fully diluted)Price relative,Cash flow summary(INRm),717667,717667,Cash flow from operationsCapexCash flow from inves
16、tmentDividendsChange in net debtFCF equity,23,900-9,058-11,631-7,979-4,50418,592,37,356-12,821-12,821-8,456-16,52825,519,47,165-14,210-14,210-8,490-24,52133,558,50,662-15,728-15,728-8,524-26,40935,341,617567517467417367,617567517467417367,Balance sheet summary(INRm)Intangible fixed assets 44,984Tang
17、ible fixed assets 22,558Current assets85,678Cash&others23,171Total assets172,339Operating liabilities57,127Gross debt17,502Net debt-5,669Shareholders funds97,709Invested capital72,922,48,54130,122112,22941,082211,52258,69618,886-22,196133,94091,114,48,66236,599142,92465,651248,86764,59818,933-46,717
18、165,33697,937,48,66243,632175,98992,060288,96570,38918,933-73,126199,643105,835,3172011HCL TechnologiesSource:HSBCNote:price at close of 17 Jan 2013,2012 2013Rel to BOMBAY SE SENSITIVE INDEX,3172014,Ratio,growth and per share analysis,Year to,06/2012a,06/2013e,06/2014e,06/2015e,Y-o-y%change,RevenueE
19、BITDAOperating profitPBTHSBC EPS,32.447.054.052.757.3,21.939.341.745.745.2,10.82.31.14.64.4,10.79.39.012.08.0,Ratios(%),Revenue/IC(x)ROICROEROAEBITDA marginOperating profit margin,2.936.327.515.719.016.4,3.145.331.919.321.719.0,3.040.626.417.220.117.3,3.139.723.515.919.817.1,EBITDA/net interest(x),N
20、et debt/equityNet debt/EBITDA(x),-5.8-0.1,-16.6-0.4,-28.3-0.8,-36.6-1.2,CF from operations/net debtPer share data(INR),EPS reported(fully diluted)HSBC EPS(fully diluted)DPSBook value,36.0536.0512.00139.01,52.3352.3312.00190.08,54.6654.6612.00233.70,59.0559.0512.00281.06,2,HCL Technologies(HCLT IN)IT
21、 Services17 January 20133Q13 results excerptsHCL Tech reported revenues of USD1,154m up3.6%q-o-q(3.1%in constant currency),beatingour estimate of USD 1,144m.Overall volumes forthe company grew 3%better than its peers TCS(1.3%q/q)and Infosys(1.5%q/q excludingLodestone).The volume growth has been larg
22、elyled by growth in the IMS division.Excluding IMSand BPO,volume growth in IT services was only0.4%q-o-q,while blended realization for thedivision was up 0.5%largely on account of crosscurrency benefit.The IT services(excluding BPO and IMS):Thecore software division has been underperformingthe compa
23、ny average growth over the last fourquarters.The EBITDA margin has althoughconsistently improved over the last six quartersdespite low volume growth.The company has beenfocusing on improving operational efficiency,asoffshore utilisation(excluding trainees)improvedfrom 69.6%in 2Q12 to 75.6%in 2Q13 an
24、d offshoremix went up from 42%in 2Q12 to 45%in 2Q13.The management remains very optimistic on theRTB spending environment,but remains cautiouson discretionary spending.Revenue profile trends for HCLT,Infrastructure division continued its stronggrowth momentum up 10.9%q-o-q on back of astrong growth
25、in 1Q13 and 4Q12(with sequentialgrowth rates of+10.4%and 6.6%respectively).IMS divisions grew by 22%in 2012(CY12)contributing to 26%of total revenues and 42%ofincremental growth in the year.We recently highlighted in our note The next bigthing on 3 December 2012 that Infrastructureservice(IMS/RMS)is
26、 the most under-penetratedtraditional IT service and consequently the fastestgrowing in the recent times.In our view,IMSgrowth outlook continues to be strong and weexpect HCLT to be a key beneficiary althoughincreased competition from Infosys and Wipro inthe IMS space is a key downside risk.Positive
27、ly,EBITDA margin for the division hasbeen consistently above 21%in the last threequarters.As new delivery models such asmanaged services/private hosting gain moreprominence,margins may shrink temporarilyowing to initial investments.,abc,1QFY12,2QFY12,3QFY12,4QFY12,1QFY13,2QFY13,Comments,Onsite volum
28、e growth(Core,4.9%,5.7%,-3.7%,5.7%,-1.2%,0.4%,software),Offshore volume growth,3.7%,4.6%,5.4%,0.5%,3.8%,0.4%,(Core software),Total volume growth(Core,4.0%,4.9%,2.9%,1.8%,2.5%,0.4%,Overall volume growth of 3%y-o-y,software),Pricing(Core software)INR topline growthUSD topline growthMargin LeversEBITDA
29、 MarginEBIT MarginNet MarginsUtilisation(including trainees)Utilisation(excl.trainees)Attrition-LTM(%)Offshore percentage of,0.5%8.0%4.1%1QFY1217.1%14.3%10.3%69.7%76.5%15.9%42.3%,-1.0%12.8%2.0%2QFY1218.5%15.8%10.5%69.6%76.1%15.7%42.1%,-1.4%-0.6%2.5%3QFY1218.4%15.7%11.2%72.2%79.0%17.0%43.8%,0.4%13.5%
30、3.0%4QFY1222.0%19.4%14.2%72.4%75.1%14.0%42.8%,-1.9%2.9%3.2%1QFY1322.2%19.4%14.2%74.2%77.4%13.6%44.3%,0.5%3.0%3.6%2QFY1322.6%19.8%15.0%75.6%77.6%13.6%44.9%,Cross currency benefit of 50bpsIMS grew 10.9%and Core software grew 1%CommentsFixed price projects increasing consistently,revenues,Fixed price c
31、ontractsPeriod end headcountIncrease in headcount,44.0%80,5203,474,46.1%83,0762,556,49.0%82,464(612),50.8%84,3191,855,51.2%85,3351,016,51.4%85,194(141),Source:Company Data,HSBC3,HCL Technologies(HCLT IN)IT Services17 January 2013Revenue mix trends,abc,Proportion,2QFY12,3QFY12,4QFY12,1QFY13,2QFY13,Co
32、mments,Geography,US,56.9%,7.4%,-1.1%,2.8%,3.9%,3.4%,EuropeAPACTotal,28.5%14.6%100%,2.7%-16.6%2.0%,5.6%11.8%2.5%,4.5%1.7%3.0%,2.8%0.5%3.2%,5.8%0.2%3.6%,Continental Europe led the growth for HCLT,Vertical Breakdown,BFSI,25.8%,2.8%,-2.7%,2.2%,4.5%,10.9%Deal wins in the first half of 2012 ramped up in t
33、he,quarter,ManufacturingTelecomRetailMPELS(Healthcare)OthersTotal,27.2%7.1%9.0%7.0%11.9%11.8%100%,3.7%-4.0%5.6%-4.0%15.4%-7.1%2.0%,0.8%10.2%0.2%7.4%8.5%7.9%2.5%,0.9%-4.2%3.0%3.0%22.3%0.1%3.0%,0.3%-3.3%10.4%7.8%14.7%-4.4%3.2%,2.1%-1.9%1.4%3.6%2.8%-3.0%3.6%,Horizontal breakdown,Enterprise Application,
34、19.0%,4.5%,4.6%,3.5%,-1.3%,-1.1%,Discretionary spending remains conservative,Services,Engineering and R&D,17.6%,3.6%,0.4%,3.6%,0.4%,0.8%,Services,Custom Application(Industry,30.6%,3.2%,0.4%,0.5%,2.2%,2.3%,Solutions),Infrastructure Services,28.4%,-3.0%,5.2%,6.5%,10.7%,10.6%,HCLT continues to have a s
35、trong deal pipeline in,IMS owing to deal renewals,BPO ServicesTotal,4.4%100%,-0.3%2.0%,7.1%2.5%,-3.6%3.0%,5.5%3.2%,1.3%3.6%,Source:Company Data,HSBC,BPO services performance improving asEBITDA margins improved to 11.6%in the quartercompared to 8.7%in 1Q and-2.2%in 2Q12.Overall margin improvement sur
36、prisedpositively:EBITDA margin expanded by 40bpdespite wage increase in the quarter that had animpact of 90bps on the margins.Marginimprovement was largely on account ofoperational efficiency and lower SG&A costs.There seems to be a serious focus in the firm oncost rationalization.4,Growth outlook:M
37、anagement guided for astrong deal pipeline.The company won 12 largemulti million-multi year deals in the quarter,while the total contract value of deals won amountto USD 1billion.,3Q11,4Q11,1Q12,2Q12,3Q12,4Q12,1Q13,4Q11,1Q12,2Q12,3Q12,4Q12,1Q13,1Q12,2Q12,3Q12,4Q12,1Q13,2Q13,3Q13,4Q13e,1Q14e,2Q14e,2Q
38、13,3Q14e,2Q13,HCL Technologies(HCLT IN)IT Services17 January 2013Chart 1:Growth in the IMS division has been outperforming the overall company growth,abc,50%,40.8%,42.9%,40%,36.8%,37.2%,30%,33.5%35.2%,30.5%,20%10%,28.9%,24.7%23.2%,21.4%18.3%19.2%,17.6%14.6%14.8%,13.5%12.1%12.5%,20.1%11.2%,13.0%,0%,8
39、.2%,5.3%,HCLT-Total grow th(y-o-y),Core Softw are-grow th(y-o-y),IMS-grow th(y-o-y),Source:Company Data,HSBCeChart 2:Headcount growth has been lagging revenue growth rate over the last few quarters in the IT services division,35%30%,28.9%,25%20%15%10%5%,22.1%,23.2%17.2%,19.2%16.4%,14.8%14.4%,12.5%10
40、.4%,8.2%,5.3%,0%-5%,Core Softw are-grow th(y-o-y),3.7%-1.2%Headcount grow th in core softw are(y-o-y),Source:Company Data,HSBCeChart 3:HCLT core software divisions growth expected to underperform the top 4 Indian IT service in the coming few quarters.,25%,24.7%,23.2%,We e xpe ct Core s oftwa re to,2
41、0%,21.0%,l a g top 4 Indi a n IT growth,15%10%,16.5%,13.6%14.6%,12.5%12.1%9.6%,11.2%8.3%,13.0%9.7%,13.8%12.2%,14.0%14.7%,12.0%,14.5%10.8%,12.4%,11.9%10.1%,5%,8.2%,5.3%,6.4%,6.7%,6.4%,7.2%,6.5%,0%,HCLT-Total grow th(y-o-y),Core Softw are-grow th(y-o-y),Top 4-USD rev(y-o-y),Source:Company Data,HSBCe.P
42、lease note that the quarters denoted in the chart belong to FY ending March 31st inline with other Indian IT companies.5,HCL Technologies(HCLT IN)IT Services17 January 2013ValuationOverall,we believe the long-term fundamentals ofthe company are robust,but the stock may gothrough volatility in the ne
43、ar term as IT spendingrecovery remains patchy or margin compressionstarts in earnest.We therefore look for correctionsto be more constructive on the stock.We reviseour FY14e EPS by+17%to factor in the bettermargin outlook.We maintain our target PE of14x,and now apply to FY14e earnings(fromMarch 2014
44、 previously)to arrive at a target priceof INR765(from INR610)and remain Neutral.We are 7%above consensus FY14e EPS.Under our research model,for stocks without avolatility indicator,the Neutral band is fivepercentage points above and below the hurdle ratefor India stocks of 11%.Our target price impli
45、es apotential return of 10.5%(including forecastdividend yield),within the Neutral band;therefore,we rate the stock Neutral.Potential return equals thepercentage difference between the current shareprice and the target price,including the forecastdividend yield when indicated.6,Downside risks:1)Macr
46、o uncertainty remains theprimary downside risk to our estimates;2)INRappreciation vs.USD(every 1%appreciationaffects margins by 30-40bp)remains a concern.Upside catalysts:1)continued deal wins may leadto better-than-sector average growth and a furtherre-rating of the stock.2)Better than expectedmarg
47、ins from in the new deal wins is an upsiderisk as well.,abc,HCL Technologies(HCLT IN)IT Services,abc,17 January 2013Disclosure appendixAnalyst CertificationThe following analyst(s),economist(s),and/or strategist(s)who is(are)primarily responsible for this report,certifies(y)that theopinion(s)on the
48、subject security(ies)or issuer(s)and/or any other views or forecasts expressed herein accurately reflect theirpersonal view(s)and that no part of their compensation was,is or will be directly or indirectly related to the specificrecommendation(s)or views contained in this research report:Yogesh Agga
49、rwalImportant disclosuresStock ratings and basis for financial analysisHSBC believes that investors utilise various disciplines and investment horizons when making investment decisions,whichdepend largely on individual circumstances such as the investors existing holdings,risk tolerance and other co
50、nsiderations.Given these differences,HSBC has two principal aims in its equity research:1)to identify long-term investment opportunitiesbased on particular themes or ideas that may affect the future earnings or cash flows of companies on a 12 month time horizon;and 2)from time to time to identify sh
