Investor's Eye
[January 17, 2013] | | |
| Summary of Contents STOCK UPDATE HCL Technologies
Recommendation: Buy
Price target: Rs830
Current market price: Rs703 Price target increased to Rs830, maintain Buy Result highlights -
Beats the Street: With its Q2FY2013 performance HCL Technologies (HCL Tech) has once again beaten the Street's estimates (it has done so for the fourth consecutive quarter) and this time it has beaten the estimates pretty convincingly with a better than expected margin performance (up 40 basis points sequentially) to 22.6% and a decent top line growth of 3.6% led by the infrastructure management services (IMS) vertical (up 10.9% sequentially). During the quarter, the company signed 12 multi-million deals across Fortune 500/Global 2000 customers. Of these, six deals are large transformational engagements with total TCV (Total contract value) of $1 billion. The management expects the deal pipeline to be higher than the last year's (notably, last year the company had signed $2.5 billion worth of deals during the October-March period). -
IMS continues to drive the top line momentum: HCL Tech's IMS vertical continues to experience strong revenue growth momentum. For Q2FY2013 it reported a sequential growth of 10.9% quarter on quarter (QoQ) to $328 million. Notably, this was on a base of 10.4% quarter-on-quarter (Q-o-Q) growth achieved in Q1FY2013. In the last four quarters, the IMS vertical has shown a compounded quarterly growth rate (CQGR) of 9.3% whereas the information technology (IT) services and business process outsourcing (BPO) verticals have recorded CQGR of 1.2% and 1.3% respectively. For the quarter under review, the IT services vertical reported a 0.7% Q-o-Q growth to $775.3 million (0.2% on constant currency basis ) with muted volume growth of 0.4% qoq whereas the realisation marginally improved by 0.2% QoQ. The BPO vertical's revenues rose by 1.8% QoQ to $51 million. Overall, the revenues grew by 3.6% to $1,154 million (ahead of our estimate of $1,146 million) and the blended volumes rose by 3 % QoQ. In rupee terms, the revenues rose by 3% QoQ and 19.6% year on year (YoY) to Rs6,273.8 crore. -
Consistency in margin performance surprises positively: In the last four quarters, HCL Tech has shown a margin improvement of around 400 basis points. More importantly, despite facing headwinds from wage hikes (in Q1 and Q2 of FY2013) and the absence of incremental currency benefits, it has managed to keep the EBITDA margin consistently above 22% in the past three quarters. For the quarter under review, the margin improved by 40 basis points QoQ to 22.6%, much better than our expectation of a 178-basis-point decline. The margin improvement in the last few quarter was a reflection of steady state margin in some of the large deals and an improvement in the operating levers like utilisation. Going forward, the management expects the EBIT margin to remain at around 18-19%, if rupee stays around Rs54-55 levels. -
Net income up by 9% QoQ and 69% YoY: Driven by an impressive margin performance and a lower than expected foreign exchange (forex) loss of Rs12.5 crore, the net income rose by 9% QoQ to Rs964.7 crore (ahead of our expectation of Rs850.8 crore). -
Valuation and view: In the last three quarters, HCL Tech has successfully conquered the Street's apprehension on margin improvement and sustainability which makes it a strong case for further re-rating. In view of the strong margin performance, we have increased our margin assumptions. Consequently we have upgraded our earnings estimates by 17%, 11% and 7% for FY2013, FY2014 and FY2015 respectively. Thus, our price target has increased to Rs830 and maintains our Buy rating on the stock and continues to retain HCL Tech as our top pick in the tier-1 IT companies. Bajaj Auto
Recommendation: Hold
Price target: Rs2,210
Current market price: Rs2,052 Price target revised to Rs2,210 Q3FY2013 conference call highlights Domestic motorcycle industry to end on flat note in FY2013, expect gradual recovery in FY2014
The sales of the domestic motorcycle industry remained flat in year-till-date (YTD) FY2013 (April-December 2012 period). After the end of the festive season, the industry sales would remain subdued in Q4FY2013. The industry is likely to end FY2013 on a flat note. The sales would improve gradually in FY2014 on back of a better economic outlook and improved sentiments on the back of softening of interest rates. New product launches to increase market share in the domestic motorcycle industry
Bajaj Auto Ltd (BAL) is banking on new products to gain market share in the domestic motorcycle industry. After the success of Pulsar NS (averaging 8,000 units/month) and Discover 125 ST (averaging 45,000 units/month), the company is banking on the recently launched Discover 100T to boost its volumes. BAL targets to sell about 40,000-45,000 units/month of Discover 100T, which would enable BAL to gain a market share in the entry-level segment. FY2014 margin to improve on back of a strong export realisation and an improved product mix
BAL's FY2014 margin is likely to improve on back of a strong export realiation. BAL has hedged about 70-75% of its FY2014 export realisation at a higher rate of Rs54-55 to the dollar as compared with Rs50 in FY2013. Further, with an improvement in the product mix on increased three-wheeler sales, we expect the company's margin to improve. Valuation
We are marginally reducing our FY2014 estimate to Rs138.1/share to factor lower volumes in the domestic motorcycle market. Our FY2015 earnings per share (EPS) estimate stands at Rs157.9/share. We assign multiple of 14x to FY2015 earnings to arrive at a price target of Rs2,210/share. We maintain "Hold" recommendation on the stock. BAL remains our preferred pick in the two-wheeler space.
VIEWPOINT Hero MotoCorp Margin pressure to impact earnings Conference call highlights FY2013 volumes to end on a flat note
HMCL is likely to end FY2013 on a flat note. We have built in average volume of 5.3 lakh units for Q4FY2013. HMCL is likely to end FY2013 with volumes of 6.13 million units as against 6.23 million achieved in FY2012. We expect a gradual recovery in the two-wheeler volumes in FY2014 on account of an improved macro-economic outlook and improved sentiments on account of softening of interest rates. Margin to remain under pressure in the near term
HMCL reported a weak margin for Q3FY2013 on account of higher raw material prices due to new launches and higher advertising expenses. HMCL expects the advertising expenses to remain high in Q4FY2013 as well, even though it expects some benefits on back of the yen depreciation. Further, HMCL increased dealers' margins by Rs100/bike during the quarter, putting further strain on its margin. We expect the company's margin to remain under pressure in Q4FY2013. Outlook and valuation
We have lowered our volume assumptions on back of the subdued domestic industry and a delay in commencing exports. Also, given the weak margin in Q3FY2013 and the likely pressure on the margins in the near term, we are lowering our FY2013 and FY2014 earnings per share (EPS) estimates. Our revised estimates stand at Rs105 and Rs112.7 per share for FY2013 and FY2014 respectively. Our FY2015 estimate stands at Rs148.5 per share. We have a neutral view on the company.
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| | | Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article. | | | |
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