HCL Tech results disappoint

HCL Tech results disappoint
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First Published: Thu, Oct 16 2008. 12 14 PM IST
Updated: Thu, Oct 16 2008. 12 14 PM IST
The company reported 9% higher revenues in rupee terms. However, in US dollar terms, revenues were flat quarter-on-quarter. In constant currency terms, the growth was about 2.4%, lower than estimates.
A scale impacted the revenue growth down in one large BFSI account in IT services ($10.5 million impact) and in one BPO client ($4.2 million impact).
The management has indicated that, there are no further scale downs expected. However, we believe that, there could be client specific scale downs, which can impact growth going forward. We have accounted for the same in our DCF analysis.
Revenues from the Top 20 accounts witnessed subdued growth in US dollar terms (7% rise in rupee terms) because of the currency fluctuations and the scale down in a large account q-o-q.
EBIDTA margins were impacted by about 102bps largely because of the consolidation of the acquisitions in the BPO business and salary increases to part employees.
Salary increases impacted margins by 145bps, acquisitions by 55bps and lower utilization by 27bps. Absence of grants had an impact of 36bps while currency impacted margins positively by 176bps.
The company expects the acquisition of Axon to be completed by March 2009 in case the scheme of arrangement is successful. It has purchased about 10.43% stake in Axon already from the market for about 42 million pounds.
We opine that, the macro scenario has changed dramatically over the past month. SAP itself has warned of lower growth going ahead. In these circumstances, we are skeptical about the actual impact of this proposed acquisition on HCLT’s financials.
We have suitably modified our FY09 earnings estimates to accommodate the 1QFY09 numbers and our changed currency assumptions. We have also brought in more caution on the demand side.
We have not considered Axon in our estimates. We now expect the rupee to end the fiscal at Rs44 per dollar.
While IT services revenues are expected to grow by 23% y-o-y, BPO and IMS revenues are expected to report growth of 31% and 35%, respectively.
We have arrived at a fair value for the stock by adopting the DCF methodology. In our DCF model, we have exercised greater caution in forecasting the growth in foreseeable future. We also note that, FY11 growth rates will be lower because of the higher tax incidence.
We arrive at a fair value of Rs212 for the stock, which is significantly lower than our earlier target of Rs347. The reduction reflects the caution, which we have exercised for the foreseeable future.
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First Published: Thu, Oct 16 2008. 12 14 PM IST
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