HCL TECH

Deal pipeline stronger, margin improvements on the cards: The management guided for deal pipeline in December 2010 much stronger than December 2008 (when the company closed deal worth US$1 bn), acompanied by improved deal win rates without offering the pricing discount as a strategy. The management is cognizant of the fact that the margins have declined by almost 600 bps in the last five quarters. We expect EBITDA margin to witness an uptick in Q2FY11 despite an increase by 50bps in S&M. According to the management, the margin has bottomed out and the exit margin for Q4FY11 would be same as Q4FY10 (18.5%). Hence, FY11 expects a margin decline of ~200bps over FY10. However, the margin would continue to see an expansion in FY12. HCL Tech increased its focus on profitability and expected to improve margin by increasing utilization, improving, revenue productivity, rationalizing cost by increasing focus on fresher recruits (setting up new training facility for fresher). The management highlighted their focus on FCF generation. For FY10, the company has FCF/EBITDA ratio in line with top three and expect ratio to be in 45-60% range. View & Valuations: We continue to believe that HCL Tech would continue stronger-than-peer top-line growth, along with margin improvement in H2FY11. The accelerated bottom-line growth could deliver positive surprise for the consensus.