Result Update

HCL Technologies Ltd.: Beating Street Expectations

HCL technologies (HCL), driven by broad based growth in IT services across all geographies and 19-Jan-2011
outsourcing contracts in addition to a shrinkage in its foreign exchange losses, beating street CMP: 508.1 Nifty: 5691.1
expectations posted a rise of 6.9% (q-o-q) in Q2FY11 net sales to Rs. 3888.4 crore. All verticals
reported strong growth (in US$) viz., Retail & CPG (+ 15.5%), Energy-Utilities-Public (+13.2%), Rating:
Healthcare (+7.4%) and Manufacturing (+ 7.2%) on a quarterly basis. BPO services remained a
laggard and declined in terms of sales by 17.1% (y-o-y) to Rs. 222.8 crore while on a quarterly
basis it rose only 0.4%.
Sector: IT - Software
On account of increased SG&A expenses (Investments made to capture greater market share) and
losses at the BPO segment, EBITDA margin for the current quarter de grew from 21.1% in Q2FY10 Equity Cap (Rs Cr): 137.0
to 16.3% during Q2FY11 while it remained flat on a quarterly basis. With a narrowing down of Face Value: 2
foreign exchange losses, net profit margin rose by 135 bps to 10.3% on a quarterly basis.
52 Week High: 517.15
As per the management guidance, the company expects a modest growth from the European
markets and opportunities exist to clinch large deals. HCL also plans to spend $ 70 mn in the 52 Week Low: 317.55
second half of ongoing fiscal, compared to about $ 90 mn it spent in the first half for various
activities. The company expects its EBIT margin to expand from the current 13.1% to 15.3% (cc) by Market Cap (Rs Cr): 34803.6
Q3FY11 on the back of higher utilization, improved realizations and lower S, G&A expenses.
Price Chart
At the CMP of Rs. 508.1, the stock trades at P/E of 21.3x and 16.6x for FY11 & FY12 consensus
estimates and we recommend a HOLD on the stock owing to rich valuations.

Revenues boosted by volume led robust growth across all Geographies, Verticals and Service
Offerings

Primarily driven by 5.1% (q-o-q) in IT services, net sales during the quarter rose by 4.9% (q-o-q) to Rs.
3888.4 crore. The verticals Retail & CPG, Energy-Utilities-Public and Healthcare grew by 15.5%, 13.2% &
7.4%, respectively, on a sequential basis. As far as geographies are concerned, all of them reported
positive growth with America, Europe and ROW (including India, China & Japan) increasing by 5.8%,
7.2% and 14.6% on quarterly basis.

Shareholding Pattern:
Growth across Industrial verticals Revenue compostion by geographies
Industry Growth YoY % Growth QoQ % 100%
12.3% 13.5%
16.3%
Retail & CPG 51.1 15.5 80%
26.6% 29.0% 29.5%
Healthcare 54.9 7.4 60%

Financial Services 25.1 5.2 40%

57.1% 58.7% 57.0%
Telecom 15.2 5.8 20%
Manufacturing 40.6 7.2 0%
Energy & Utility 30.5 13.2 Q2FY11 Q1FY11 Q2FY10

Media and Ent 25.4 6.2 America Europe Rest of World

 Result Update

The company continued to register impressive win ratios with 50 plus transformational deals and superior customer acquisitions with addition of 46 new customers, of which
12 new customers are in G-500.

Profit margins drop on the backdrop of salary hikes, increased SG&A expenses and losses at BPO division

Largely impacted by higher salary payout (salary hike + increased headcounts) and increased SG&A expenses (+3.9% q-o-q), EBITDA margin during Q2FY11 fell by 480
bps (y-o-y) to 16.3%. The company increased SG&A expenses to enhance its presence in emerging markets along with clinching some major deals, so as to capture
greater market share. The BPO segment of the company was a slack in the growth and decreased by 17.1% (y-o-y) in revenue terms while the EBITDA margin also
declined from 7.9% (y-o-y) during Q2FY10 and de grew to 4.8% in Q2FY11.

The company expects the margin to expand during Q3FY11 and in the next quarter, as the company puts more employees on billable contracts and cuts expenses. Despite
an increment in the tax provision, the net profit margin rose by 135 bps (q-o-q) to 10.3%.

Robust hiring on the back of positive demand outlook

On backdrop of securing several major deals and robust demand outlook, the company during the current quarter added 2,049 employees on a net basis and made 8,379
gross additions, taking total employee headcount to 72267. Meanwhile, due to increased hiring, employee utilization rates in offshore sites for Q2FY11 remained flat and
stood at 70.1% on a sequential basis while it declined from 76.4% on a yearly basis. For Q2FY11 attrition rate for IT services and BPO services stood at 17.2% and 7.7%,
respectively.

The volume growth for the current quarter for offshore and onshore services stands at 72.4% & 27.6%, respectively.

Manpower Details Software operational metrics

Q2FY10 Q1FY11 Q2FY11 Q2FY10 Q1FY11 Q2FY11
IT Services Offshore- including trainees 76.4% 70.1% 70.1%
Gross Addition 3590 8333 4989 Offshore- excluding trainees 77.9% 74.1% 75.0%
Gross Lateral Addition 2980 5598 3971 Onsite 96.7% 95.7% 95.9%
Attrition Rate % (LTM) 12.8 16.7 17.2 Client Contribution to Revenues
BPO Services Q2FY10 Q1FY11 Q2FY11
Gross Addition 1939 3452 3390 Top 5 Clients 18.0% 17.5% 16.8%
Gross Lateral Addition 692 746 734 Top 10 Clients 26.2% 25.8% 25.6%
Attrition rate % (Quarterly) 21 10.3 10.8 Top 10 Clients 36.9% 36.8% 36.6%

Valuation and recommendation

At the CMP of Rs. 508.1, the stock trades at P/E of 21.3x and 16.6x for FY11 & FY12 consensus estimates and we recommend a HOLD on the stock owing to rich
valuations.
 Result Update

(Rs. In Cr.)
HCL Technologies Ltd. Q2FY11 Q2FY10 % Chg. Q2FY11 Q1FY11 % Chg. HY201012 HY200912 % Chg.
Net Sales 3888.4 3041.4 27.9 3888.4 3708.1 4.9 7596.5 6083.9 24.9
Other operational Income 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Total Oper. Income(TOI) 3888.4 3041.4 27.9 3888.4 3708.1 4.9 7596.5 6083.9 24.9
Raw Materials Cons.- 2661.3 1956.5 36.0 2661.3 2534.6 5.0 5195.9 3878.2 34.0
% to TOI 68.4% 64.3% - 68.4% 68.4% - 68.4% 63.8% -
Stock adj. (-)Inc / (+)Dec- - - -
% to TOI % % - % % - % % -
Net Raw Mat adj. for stock 2661.3 1956.5 36.0 2661.3 2534.6 5.0 5195.9 3878.2 34.0
% to TOI 68.4% 64.3% - 68.4% 68.4% - 68.4% 63.8% -
Other expenses 623.5 609.4 2.3 623.5 654.3 -4.7 1277.8 1233.6 3.6
% to TOI 16.0% 20.0% - 16.0% 17.7% - 16.8% 20.3% -
Contribution Net_Sales 603.6 475.5 26.9 603.6 519.2 16.3 1122.8 972.1 15.5
Personnel - - -
% to TOI % % - % % - % % -
Total expenditure 3284.8 2565.9 28.0 3284.8 3188.9 3.0 6473.7 5111.8 26.6
Operating Profit 603.6 475.5 26.9 603.6 519.2 16.3 1122.8 972.1 15.5
% to TOI 15.5% 15.6% - 15.5% 14.0% - 14.8% 16.0% -
Non-Operating Income 5.4 -12.2 LP 5.4 0.5 980.0 5.9 -18.6 LP
Interest - - -
Exceptional Items - - -
Gross Profit 609.0 463.3 31.5 609.0 519.7 17.2 1128.7 953.5 18.4
Depreciation 106.2 97.7 8.7 106.2 106.4 -0.2 212.6 196.2 8.4
PBT before Extra-ord 502.8 365.6 37.5 502.8 413.3 21.7 916.1 757.3 21.0
% to TOI 12.9% 12.0% - 12.9% 11.2% - 12.1% 12.5% -
Extraordinary Items - - -
PBT 502.8 365.6 37.5 502.8 413.3 21.7 916.1 757.3 21.0
Tax Rate 20.5% 18.6% - 20.5% 19.9% - 20.3% 18.3% -
Prov. for Tax 103.1 68.1 51.4 103.1 82.4 25.1 185.5 138.5 33.9
% to TOI 2.7% 2.2% - 2.7% 2.2% - 2.4% 2.3% -
Profit after Tax 399.7 297.5 34.4 399.7 330.9 20.8 730.6 618.8 18.1
% to TOI 10.3% 9.8% - 10.3% 8.9% - 9.6% 10.2% -
Minority Interest 0.2 0.2 0.0 0.2 0.2 0.0
PAT (adj. For MI) 399.7 297.7 34.3 399.7 331.1 20.7 730.8 619.0 18.1
Face Value 2.0 2.0 0.0 2.0 2.0 2.0 2.0 0.0
Equity Share capital 136.8 134.7 1.6 136.8 136.0 0.6 136.8 134.7 1.6
EPS (Rs.) 5.8 4.4 32.3 5.8 4.9 19.9 10.7 9.2 16.3
CEPS (Rs.) 7.4 5.9 26.0 7.4 6.4 15.1 13.8 12.1 14.0

Source: ACE Equity

 Result Update
Source: ACE Equity

Source: ACE Equity

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