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HCL Technologies

October 20, 2010

Cutting Edge Outsourced Software Development Company HCL Technologies reported Strong revenue growth yet again with revenues at US$ 804 mn (+9% QoQ ) beating est, however balanced with operating margins down ~230 bps QoQ, ~650 bps YoYn Apps/IMS continue to driven growth (9%QoQ). Rev from Europe were up 18% QoQ with finsvcs /telecom/retail seeing +10%/10%/13% QoQ. Strong Net adds(5k+) for 2nd qtr in a row.

While gross margin at 31.6% was 50bp higher than our estimate, SG&A, which had declined to 14.3% of revenue in FY10, increased to 15.4%. This is closer to the historical average of 15-16% (FY06-10).

IT Services delivered ~8% volume growth. Infrastructure Services witnessed ~9% qoq growth. BPO business delivered ~6% revenue growth ($ terms) and gross margins improved to ~18% (from ~12% earlier). We continue to factor in ~$7m EBIT losses (on an avg) over next five quarters. HCLT hired ~5,600 employees in the quarter (on the back ~6,400 employee hired last quarter).

EPS is likely to grow over 30% YoY due to lower forex losses, EBITDA growth is likely to be only 10-11%. FY 11 EPS is expected to be Rs 25 and that for FY 12 it is expected to be Rs 30.

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