HCL Tech (Q1 F6/14)

India Infoline News Service | Mumbai |

HCL Tech’s Q1 F6/14 dollar revenues came in largely in-line with expectation at US$1.270bn versus our estimate of US$1.275bn.

CMP Rs1,078, Target Rs1,241, Upside 15.1%
 
  • Dollar revenues in-line with estimates driven by IMS business; Software services continues to be weak

  • Narrow based growth across services, geographies; Top clients drive growth

  • Rupee depreciation and operational efficiency drive material OPM beat

  • Deal momentum continues; Broad based growth can drive further re-rating. Maintain BUY

Result table
(Rs mn)
Q1 F6/14
Q4 F6/13
% qoq
Q1 F6/13
% yoy
Net sales
79,610
69,800
14.1
60,910
30.7
Operating profit
20,930
16,150
29.6
13,510
54.9
OPM (%)
26.3
23.1
315 bps
22.2
411 bps
Depreciation
(1,980)
(1,700)
16.5
(1,692)
17.0
Other income
(1,200)
770
(255.8)
(253)
-
PBT
17,750
15,220
16.6
11,565
53.5
Tax
(3,590)
(3,300)
8.8
(2,718)
32.1
Effective tax rate (%)
20.2
21.7
-
23.5
-
ESOP Charge
-
(118)
(100.0)
(203)
(100.0)
Adjusted PAT
14,160
11,802
20.0
8,644
63.8
Adj. PAT margin (%)
17.8
16.9
88 bps
14.2
360 bps
Reported PAT
14,160
11,920
18.8
8,847
60.1
EPS (Rs)
20.6
17.3
18.8
12.8
60.1
Source: Company, India Infoline Research

Dollar revenues ahead of expectation driven by IMS business; Software services continues to be weak

HCL Tech’s Q1 F6/14 dollar revenues came in largely in-line with expectation at US$1.270bn versus our estimate of US$1.275bn. This 3.5% sequential growth (3.6% qoq in cc) was mainly supported by the sustained robust performance of the Infrastructure business which grew 8.8% qoq in cc terms. On the flip side, the software services business continued its sluggish trend (sub 2% growth). This tepid growth was on the back of sustained weakness in previous 4-5 quarters. HCLT’s declared multi-year transformational deal wins of TCV US$1bn+ further vindicating its strategy focused integrated (total IT outsourcing) re-bid deals market.

Narrow based growth across services; Top clients drive growth

The Q1 F6/14 growth at HCLT was quite narrow based across service lines but broad based across verticals. Amongst services, the growth was again lop-sided towards IMS which grew 8.8% in constant currency (cc) terms. All the other services grew just 1-2% qoq in cc terms. Amongst geographies, RoW  (+8.5% qoq) and NA (+4% qoq) were the key growth drivers. Within verticals, growth was led by Financial services (+6.9% qoq), Manufacturing (+5.4% qoq) and Healthcare (+6.5% qoq). Telecom, Media and Retail on the other hand  had a de-growth on a sequential basis. Among the clients, the top6-10/Top11-20 clients showed decent growth of 7.1%/5.7% qoq in dollar terms. Also, there has been improvement within client revenue buckets with US$40mn+/US$100mn+ clients improving by 5/1 respectively over past four quarters.


Rupee depreciation and operational efficiency drive material OPM beat

The Q1 F6/14 consolidated operating margin for HCLT was materially better than expected. The margin expanded 315 bps qoq to 26.3% (versus our estimate of 24.6%) and now higher than the OPM for Infosys. The beat was on the back of strong rupee depreciation gains (+250bps impact) SG&A leverage (+10bps) and other operational efficiencies (+90bps). All these tailwinds more than offset the partial wage hike impact of 50bps during the quarter. On the back of the substantial margin beat, the net profit came in ten percent higher than estimated at RS14.2bn. On the employee front, the employee additions were decent at 2% qoq. IT services attrition increased to 16.1% in Q1 F6/14 from 14.9% last quarter

Deal momentum continues; Broad based growth can drive further re-rating. Maintain BUY

The key highlight of Q1 F6/14 quarter for HCLT was the materially higher than expected margin expansion. On the other hand, the in-line revenue performance was not impressive considering the better-than-estimated revenue growth at peers in the current quarter. The revenue growth was

BSE 878.85 12 (1.38%)
NSE 879.35 13 (1.50%)

***Note: This is a NSE Chart

 

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