HCL Tech

4QFY2010 Result Update | IT
August 5, 2010

HCL Technologies ACCUMULATE
CMP Rs413
Performance Highlights Target Price Rs440
(Rs in cr) 4QFY10 3QFY10 %chg (qoq) 4QFY09 %chg (yoy) Investment Period 12 Months
Net Revenue 3,425 3,076 11.4 2,908 17.8
Stock Info
EBITDA Margin (%) 18.6 19.7 (1.1) 22.1 (3.5)
Sector IT
PAT 342 344 (0.6) 330 3.6
Market Cap (Rs cr) 28,014
Source: Company, Angel Research
Beta 1.1
During 4QFY2010, HCL Tech delivered robust top-line performance by posting 52 Week High / Low 449/240
11.4% qoq growth. However, higher-than-expected contraction in EBITDA margin Avg. Daily Volume 293455
coupled with higher forex loss impacted profitability on a sequential basis, which, Face Value (Rs) 2
however, witnessed an increase of 3.6% yoy.
BSE Sensex 18,173
HCL Tech witnessed strong broad-based performance: HCL Tech recorded 11.4% Nifty 5,448
qoq (17.8% yoy) top-line growth in 4QFY2010 backed by ~10% growth in
Reuters Code HCLT.BO
volumes during the quarter. The blended pricing remained stable. Segment-wise,
Bloomberg Code HCLT@IN
strong growth was witnessed in core IT services and infrastructure services
segments, which grew sequentially by 13.2% (15.7% yoy) and 12.6% (49.7% yoy),
respectively, during the quarter. However, the BPO business remained a strong
Shareholding Pattern (%)
laggard witnessing a decline of 9.4% qoq (down 24.7% yoy). The company added
51 new clients during the quarter, taking its total active client count to 408. HCL Promoters 65.3
Tech witnessed four deal wins in IT-BPO integrated offerings in 4QFY2010 and MF / Banks / Indian Fls 8.2
two large deals viz. US $500mn Merc deal and US $100bn Singapore Stock FII / NRIs / OCBs 22.9
Exchange deal. During the quarter, EBITDA margin declined by 112bp qoq (down Indian Public / Others 3.6
351bp yoy) due to lower utilisation, adverse currency and higher SG&A. Further,
on account of high forex losses, the company reported Rs158cr loss in other
income. This coupled with lower margins resulted in a bottom-line decline of Abs. (%) 3m 1yr 3yr
0.6% qoq (up 3.6% yoy) to Rs342cr.
Sensex 6.0 14.3 20.0
Outlook and valuation: We expect HCL Tech to record a 20.3% CAGR in the top HCL Tech 2.0 62.0 38.4
line, while the bottom line is expected to post a 24.7% CAGR over FY2010–12E.
The stock is currently trading at 17.1x FY2011E EPS of Rs24.1 and 14.1x on its
FY2012E EPS of Rs29.3. We have valued HCL Tech at 15x FY2012E earnings
(historical average of 14.5x during FY2005–10) and at 27% discount to our
Infosys target P/E multiple of 21x (historical discount of 27% during 2005–10).
We maintain an Accumulate rating on the stock with a revised Target Price of
Rs440 (Rs420), implying an upside of 7%.
Key financials (Consolidated - US GAAP)
Y/E June (Rs cr) FY2009 FY2010 FY2011E FY2012E
Net sales 10,591 12,565 15,024 18,168
% chg 40.0 18.6 19.6 20.9
Net profit 1,278 1,303 1,665 2,024
% chg 13.6 2.0 27.8 21.6
EBITDA Margin (%) 21.8 20.5 18.5 18.0
EPS (Rs) 18.7 18.9 24.1 29.3
P/E (x) 22.1 21.9 17.1 14.1
P/BV (x) 5.0 4.0 3.5 3.0
RoE (%) 23.4 20.5 22.1 23.2
RoCE (%) 22.0 16.8 22.4 27.9
Vibha Salvi
EV/Sales (x) 3.8 2.7 2.1 1.7
022 – 4040 3800 Ext: 329
EV/EBITDA (x) 12.4 10.9 9.6 7.7 vibhas.salvi@angeltrade.com

Please refer to important disclosures at the end of this report 1

HCL Technologies | 4Q FY2010 Result Update

Exhibit 1: 4QFY2010 - Consolidated financial performance (US GAAP)
Y/E June (Rs cr) 4QFY10 3QFY10 % chg 4QFY09 % chg FY2010 FY2009 % chg
(qoq) (yoy)
Revenue 3,425 3,076 11.4 2,908 17.8 12,565 10,591 18.6
Direct Costs 2,292 2,038 12.5 1,814 26.4 8,196 6,548 25.2
Gross Profit 1,133 1,038 9.2 1,095 3.5 4,369 4,043 8.1
SG&A Expenses 495 430 15.0 451 9.8 1,796 1,736 3.5
Operating Profit (EBITDA) 638 607 5.1 644 (0.9) 2,573 2,307 11.5
Other Income (158) (77) (101) 56.9 (529) (326) 62.4
Depreciation & Amortization 113 110 2.9 120 (5.6) 501 449 11.5
Income before Income Taxes 367 421 (12.7) 424 (13.3) 1,543 1,532 0.7
Tax 25 77 (67.0) 94 (72.8) 240 254 (5.5)
Share of Equity Investment & Minority Int. - - - - -
Net Income 342 344 (0.6) 330 3.6 1,303 1,277 2.0
Diluted EPS (Rs) 19.8 19.9 (0.5) 19.6 1.0 18.9 19.1 (1.0)
Gross Profit Margin (%) 33.1 33.7 37.6 34.8 38.2
EBITDA Margin (%) 18.6 19.7 22.1 20.5 21.8
Net Profit Margin (%) 10.0 11.2 11.3 10.4 12.1

Exhibit 2: 4QFY2010 – Actual v/s Angel estimates

(Rs in cr) Estimates Actual Variation
Net Revenue 3,109 3,425 10.2
EBITDA Margin (%) 19.5 18.6 (0.9)
PAT 348 342 (1.8)

Top-line growth led by strong volume

HCL Tech posted 11.4% qoq (17.8% yoy) top-line growth in 4QFY2010, backed
by ~10% growth in volumes during the quarter. However, the blended pricing
remained stable. Segment-wise, strong growth was witnessed in the core IT
services and infrastructure services segments, which grew sequentially by 13.2%
(15.7% yoy) and 12.6% (49.7% yoy), respectively. However, the BPO business
remained a strong laggard witnessing a decline of 9.4% qoq (24.7% yoy). In US
Dollar terms, the core IT services and infrastructure services business reported
revenue of US $527mn and US $165mn, witnessing 9.4% and 8.9% qoq growth,
respectively; while the BPO segment registered revenue of US $45.5mn,
witnessing a 12.5% qoq decline qoq.

HCL Tech witnessed strong growth of 15% and 12% qoq in North America and
Asia Pacific, respectively, with Europe being a laggard but still witnessing growth
of 2.6% qoq. The company witnessed growth across all its verticals, with the retail
and healthcare verticals witnessing stupendous qoq growth of 22% each. The
energy and utilities and financial services verticals also witnessed strong growth of
~9% each.

August 5, 2010 2


HCL Tech added 51 new clients during 4QFY2010, taking its total active client
count to 408 and witnessed ~10–12% qoq growth each in its in Top-5 to Top-20
client accounts. The company witnessed four deal wins in IT-BPO integrated
offerings in 4QFY2010 and two large deals viz. US $500mn Merc deal and US
$100bn Singapore Stock Exchange deal.

Adverse currency, lower utilisation, higher SG&A hurt margins

During the quarter, onsite utilisation dipped from 97% to 95% qoq in 4QFY2010,
which negatively impacted margins by 71bp. Further, the adverse currency
movement had a 43bp negative impact on margins. Incremental marketing costs
led to an increase in SG&A during the quarter, thereby impacting margins by
another 47bp qoq. However, other operational efficiency gains had a positive
impact of 48bp qoq on margins. Thus, the EBITDA margin witnessed a 112bp qoq
dip (down 351bp yoy).

Segment-wise, the EBITDA margin in the core IT services and BPO segments
dipped by 160bp and 690bp qoq (down 260bp and 2640bp yoy), respectively.
The company continued to report loss at the EBITDA level in the BPO segment,
which stood at Rs24cr v/s Rs10cr in 3QFY2010. However, the infrastructure
services segment witnessed a 50bp qoq increase in margins (down 50bp yoy).

Exhibit 3: EBITDA margin trend

24
23
22
21
20
(%)

19
18
17
16
15
1QFY08

2QFY08

3QFY08

4QFY08

1QFY09

2QFY09

3QFY09

4QFY09

1QFY10

2QFY10

3QFY10

4QFY10


Bottom line declined due to higher forex loss

HCL Tech reported forex loss during the quarter, on account of old hedges at
lower rates and because of US $4.2mn forex hit on foreign assets and liabilities.
Thus, net forex loss was up at Rs137cr v/s Rs62.6cr in 3QFY2010, while other
income stood at negative Rs20.8cr v/s Rs13.9cr in 3QFY2010. Thus, on account
of higher forex and other income losses, the company reported Rs158cr net loss in
other income. Moreover, the effective tax rate during the quarter was low at 6.9%
compared to 18% in 3QFY2010 because of one-time tax reversal. Accordingly,
the bottom line declined 0.6% qoq (up 3.6% yoy) to Rs342cr.

August 5, 2010 3


Strong lateral hiring exhibiting positive business environment

During the quarter, HCL Tech made total gross addition of 7,136 employees,
while it made net addition of 6,428 employees. Thus, the company’s total
headcount stood at 64,557 as of 4QFY2010. HCL Tech added 5,409 (added
3,152 in 3QFY2010) net employees in the IT services segment and 1,019 in the
BPO segment (net down by 711 in 3QFY2010) during the quarter.

During the quarter, the company’s attrition rate in the IT services segment
increased to 15.7% qoq from 14%. However, the attrition rate in the BPO segment
declined to 15.3% from 20.3%.

1QFY2011E revenue guidance

Going forward, top-line growth would be volume-led, with pricing. The company
has given salary hikes with effect from July 2010. Thus, we believe salary hikes,
robust lateral hiring and adverse currency movement will lead to a 300bp decline
in HCL Tech’s margins in 1QFY2011. However, through other operational levers,
the company expects to absorb this margin pressure to some extent towards the
end of FY2011.

Investment arguments
Growth led by higher demand pipeline, discretionary spends

HCL Tech’s total deal wins in FY2010 aggregated to US $2bn, which includes two
large deals viz. Merc and Singapore Stock Exchange. Of all these, deals won
through Axon were from new client accounts, whereas the others were from
existing clients. Discretionary spends are witnessing a pick-up in demand on
account of integration work required for mergers and demergers by corporates
mainly in the financial services vertical. Also, large-scale transformation projects,
viz. the entire data centre migration of clients, are being signed up. A strong deal
pipeline is been witnessed in the media, healthcare, retail and manufacturing
verticals through new client wins, whereas in the financial services vertical, strong
traction is been witnessed from existing client accounts.

BPO repositioning to yield better prospects in the long run

The BPO business witnessed a decline for a couple of consecutive quarters and for
FY2010. Hence, the company is evaluating its overall BPO business operations,
with plans to grow core BPO operations by investing in them. On the other hand,
non-core and non-strategic BPO operations are expected to be downsized over a
period.

Currently the IBS contract, which is in the insurance space, is making losses, but it
is a strategically important business. Hence, HCL Tech plans to continue investing
in it for a couple of quarters going ahead. Further, through the new ELAS
contract, the company aims to gain critical scale and use ELAS to further develop
its BPO platform. Thus, with the ongoing huge investments, we believe the BPO
business will continue to witness muted growth and depressed margins even in the
next six quarters; however, it would see a turnaround in the long run.

August 5, 2010 4


Revised hedges to mitigate adverse currency movement impact

The old hedges (taken more than two years ago) are tailing off, which will take
another 1–2 quarters by recording US $15mn of hedge losses.

The new hedging policy would, henceforth, cover the company’s revenue for the
next three months. HCL Tech’s hedge position now stands at US $362mn. The
average booked rate has improved with US $95mn of hedges at Rs47.37. Thus,
we believe the company’s forex losses as witnessed in the past couple of quarters
on account of the old hedging policy at lower INR-USD rate would come down,
thereby improving profitability.

Margins to be maintained through various operational levers

HCL Tech plans to add freshers at an appropriate time whenever required.
Another margin lever for the company would be its increased focus on campus
hiring and SEZ operations.

In the infrastructure services segment, the company’s margin has expanded to
18% from 10%, with growth in scale of operations in the last six years. The same
could be demonstrated in the company’s other businesses, mainly the BPO,
through timely investments in the right areas and business propositions. Thus, the
company’s long-term strategy is to remain constant on margins and then use
some of these margin levers to make up for any exchange impact.

Outlook and valuation

We expect HCL Tech to record a 20.3% CAGR in the top line, while the bottom
line is expected to post a 24.7% CAGR over FY2010–12E. The stock is currently
trading at 17.1x FY2011E EPS of Rs24.1 and 14.1x on its FY2012E EPS of Rs29.3.
We have valued HCL Tech at 15x FY2012E earnings (historical average of 14.5x
during FY2005–10) and at 27% discount to our Infosys target P/E multiple of 21x
(historical discount of 27% during 2005–10). We maintain an Accumulate rating
on the stock with a revised Target Price of Rs440 (Rs420), implying an upside
of 7%.

Exhibit 4: Key assumptions
FY2011E FY2012E
Volume Growth - IT services (%) 14.8 13.6
Pricing Growth - IT services (%) 0.0 0.2
Revenue Growth - US $ terms (%) 19.5 19.6
USD-INR Rate (realised) 46.5 47
Revenue Growth - INR terms (%) 19.6 20.9
EBITDA Margin (%) 18.5 18.0
Tax Rate (%) 22.0 24.0
EPS Growth (%) 27.8 21.6

August 5, 2010 5


Exhibit 5: Change in estimates

FY2011E FY2012E
Earlier Revised Earlier Revised
Rs in cr Var. (%) Var. (%)
Estimates Estimates Estimates Estimates
Net Revenues 13,611 15,024 10.4 15,903 18,168 14.2
EBIDTA 2,858 2,779 (2.8) 3,260 3,270 0.3
PBT 1,996 2,135 7.0 2,421 2,663 10.0
Tax 362 470 29.7 487 639 31.3
PAT 1,637 1,665 1.7 1,936 2,024 4.6


We have upgraded our FY2011E and FY2012E top-line estimates, in line with
strong cues from the management in terms of volume-driven growth with robust
manpower infusion, both laterals and freshers. However, we expect the EBITDA
margin to be lower than our earlier expectations on account of higher opex and
personnel costs along with the unfavorable cross-currency movement. As guided
by the management, we have assumed higher tax rates of 22% and 24% (earlier
18% and 20%, respectively) in FY2011E and FY2012E, respectively. In line with
the overall strong upgradation of our top-line estimates and because of lowering
of forex losses on account of the new hedging policy, our PAT estimates are also
expected to be better than our earlier estimates for FY2011E and FY2012E.

Exhibit 6: Angel EPS forecast v/s consensus
Bloomberg
Year (%) Angel forecast Var. (%)
consensus
FY2011E 24.1 25.0 (3.6)
FY2012E 29.3 30.0 (2.3)

Exhibit 7: One-year forward P/E band

800
700 26x

600
Share Price (Rs)

19x
500
400 15x

300
8x
200
100
0
Apr-06

Apr-07

Apr-08

Apr-09

Apr-10
Oct-05

Oct-06

Oct-07

Oct-08

Oct-09
Jan-06

Jan-07

Jan-08

Jan-09

Jan-10
Jul-05

Jul-06

Jul-07

Jul-08

Jul-09

Jul-10


August 5, 2010 6


Exhibit 8: Premium / Discount in HCL Tech P/E versus Infosys P/E

50
35
20
5
(10)
(25)
(40)
(55)
(70)

Aug-05

Aug-06

Aug-07

Aug-08

Aug-09
Feb-06

Feb-07

Feb-08

Feb-09

Feb-10
Nov-05

Nov-06

Nov-07

Nov-08

Nov-09
May-06

May-07

May-08

May-09

May-10
Premium/Discount to Infosys Avg. Historical Discount to Infosys

Exhibit 9: Recommendation summary
Company Reco. CMP Tgt. price Upside FY2012E FY2012E FY2010-12E FY2012E FY2012E
(Rs) (Rs) (%) P/BV (x) P/E (x) EPS CAGR (%) RoCE (%) RoE (%)
3iInfotech Buy 68 100 46.7 0.7 4.1 208.9 15.6 18.6
Educomp Buy 612 734 19.9 2.8 13.3 26.9 21.0 22.3
HCL Tech Accumulate 413 440 6.6 3.0 14.1 10.3 27.9 23.2
Infosys Neutral 2,873 - 0.9 4.6 20.8 12.6 33.1 25.0
Infotech Enterprises Buy 160 192 20.1 1.3 8.3 12.1 18.1 17.0
Mphasis Buy 621 872 40.4 2.5 9.6 14.9 41.6 29.2
NIIT Buy 69 83 21.1 1.8 11.9 16.6 12.1 15.8
TCS Neutral 877 - 4.9 5.3 20.0 11.7 53.2 30.4
Tech Mahindra Buy 726 950 30.8 2.2 13.6 (0.5) 56.9 18.5
Wipro Accumulate 431 470 9.0 3.5 17.4 14.7 28.0 23.0

August 5, 2010 7


Profit & Loss Statement (Consolidated - US GAAP)

Y/E June (Rs cr) FY2009 FY2010 FY2011E FY2012E
Gross sales 10,608 12,565 15,024 18,168
Less: Excise duty 17 - - -
Net Sales 10,591 12,565 15,024 18,168
Other operating income - - - -
Total operating income 10,591 12,565 15,024 18,168
% chg 40.0 18.6 19.6 20.9
Total Expenditure 8,285 9,992 12,244 14,898
Cost of Revenues 6,548 8,196 10,141 12,354
SGA 1,736 1,796 2,103 2,544
EBITDA 2,307 2,573 2,779 3,270
% chg 42.2 11.5 8.0 17.7
(% of Net Sales) 21.8 20.5 18.5 18.0
Depreciation& Amortisation 449 501 575 671
EBIT 1,857 2,072 2,204 2,599
% chg 40.9 11.6 6.4 17.9
(% of Net Sales) 17.5 16.5 14.7 14.3
Other Income (net of interest expn. (328) (529) (70) 64
(% of PBT) (21.4) (34.3) (3.3) 2.4
Share in profit of Associates - - - -
Recurring PBT 1,529 1,543 2,135 2,663
% chg 22.0 0.9 38.3 24.8
Extraordinary Expense/(Inc.) - - - -
PBT (reported) 1,529 1,543 2,135 2,663
Tax 254 240 470 639
(% of PBT) 16.6 15.6 22.0 24.0
PAT (reported) 1,275 1,303 1,665 2,024
Add: Share of earnings of associate 2.7 - - -
Less: Minority interest (MI) - - - -
Prior period items - - - -
PAT after MI (reported) 1,278 1,303 1,665 2,024
ADJ. PAT 1,278 1,303 1,665 2,024
% chg 13.6 2.0 27.8 21.6
(% of Net Sales) 12.1 10.4 11.1 11.1
Basic EPS (Rs) 19.1 19.2 24.6 29.9
Fully Diluted EPS (Rs) 18.7 18.9 24.1 29.3
% chg 12.9 0.9 27.8 21.6

August 5, 2010 8


Balance Sheet (Consolidated - US GAAP)
Y/E June (Rs cr) FY2009 FY2010E FY2011E FY2012E
SOURCES OF FUNDS
Equity Share Capital 134 135 135 135
Preference Capital - - - -
Reserves& Surplus 5,550 6,901 7,916 9,290
Shareholders’ Funds 5,684 7,037 8,052 9,426
Minority Interest 2 - - -
Total Loans 2,977 2,663 1,332 266
Other Liabilities (Incl. Deferred Tax) (97) (225) (59) 137
Total Liabilities 8,566 9,475 9,325 9,829
APPLICATION OF FUNDS
Gross Block 3,328 4,092 5,000 6,100
Less: Acc. Depreciation 1,742 2,243 2,818 3,489
Net Block 1,586 1,849 2,182 2,611
Capital Work-in-Progress - - - -
Goodwill/ Intangible Assets 4,533 4,312 3,950 3,700
Investments 37 71 71 71
Current Assets 5,678 6,376 6,918 8,066
Cash 420 469 526 651
Loans & Advances - - - -
Other 5,257 5,907 6,392 7,415
Current liabilities 3,268 3,133 3,796 4,618
Net Current Assets 2,410 3,243 3,122 3,448
Mis. Exp. not written off - - - -
Total Assets 8,566 9,475 9,325 9,829

August 5, 2010 9


Cash Flow Statement (Consolidated - US GAAP)
Y/E June (Rs cr) FY2009 FY2010E FY2011E FY2012E
Profit before tax 1,211 1,543 2,135 2,663
Depreciation 449 501 575 671
Change in Working Capital (578) (2,146) (674) (1,156)
Less: Other income 6 (529) (70) 64
Direct taxes paid 74 240 470 639
Cash Flow from Operations 1,002 187 1,636 1,475
Inc./ (Dec.) in Fixed Assets (531) 263 333 429
Inc./ (Dec.) in Investments 1,475 34 - -
Inc./ (Dec.) in loans and advances - - - -
Other income (4,355) 529 70 (64)
Cash Flow from Investing (3,412) 825 403 365
Issue of Equity 22 - - -
Inc./(Dec.) in loans 2,993 (314) (1,332) (1,065)
Dividend Paid (Incl. Tax) 716 650 650 650
Others 66 - - -
Cash Flow from Financing 2,365 (964) (1,982) (1,715)
Inc./(Dec.) in Cash (45) 48 57 125
Opening Cash balances 465 420 469 526
Closing Cash balances 420 469 526 651

August 5, 2010 10


Key Ratios
Y/E June FY2009 FY2010E FY2011E FY2012E
Valuation Ratio (x)
P/E (on FDEPS) 22.1 21.9 17.1 14.1
P/CEPS 16.3 15.8 12.7 10.6
P/BV 5.0 4.0 3.5 3.0
Dividend yield (%) 2.6 1.9 1.9 1.9
EV/Sales 2.7 2.2 1.8 1.4
EV/EBITDA 12.4 10.9 9.6 7.7
EV / Total Assets 39.3 33.9 29.1 23.4
Per Share Data (Rs)
EPS (Basic) 19.1 19.2 24.6 29.9
EPS (fully diluted) 18.7 18.9 24.1 29.3
Cash EPS 25.3 26.1 32.4 39.0
DPS 10.7 8.0 8.0 8.0
Book Value 83.3 103.1 117.9 138.1
DuPont Analysis
EBIT margin 17.5 16.5 14.7 14.3
Tax retention ratio 83.4 84.4 78.0 76.0
Asset turnover (x) 1.1 1.2 1.5 1.6
ROIC (Post-tax) 15.8 17.1 16.6 17.8
Cost of Debt (Post Tax) 0.0 0.0 0.0 0.0
Leverage (x) 0.5 0.4 0.2 0.0
Operating ROE 31.9 25.6 31.4 33.4
Returns (%)
ROCE (Pre-tax) 30.6 28.7 32.0 35.6
Angel ROIC (Pre-tax) 36.6 34.0 41.1 46.9
ROE 23.4 20.5 22.1 23.2
Turnover ratios (x)
Asset Turnover (Gross Block) 1.3 1.5 1.7 1.9
Inventory / Sales (days) - - - -
Receivables (days) 93 89 85 85
Payables (days) 11 - - -
Working capital cycle (ex-cash) (days) 78 69 65 54
Solvency ratios (x)
Net debt to equity 0.4 0.3 0.1 (0.0)
Net debt to EBITDA 1.1 0.8 0.3 (0.1)
Interest Coverage (EBIT / Interest) 0 0 0 0

August 5, 2010 11


Research Team Tel: 022 - 4040 3800 E-mail: research@angeltrade.com Website: www.angeltrade.com

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Disclosure of Interest Statement HCL Tech
1. Analyst ownership of the stock No
2. Angel and its Group companies ownership of the stock No
3. Angel and its Group companies' Directors ownership of the stock No
4. Broking relationship with company covered No

Note: We have not considered any Exposure below Rs 1 lakh for Angel, its Group companies and Directors.

Ratings (Returns) : Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%)
Reduce (-5% to 15%) Sell (< -15%)

August 5, 2010 12

HCL Tech

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