HCL Tech (Q3 F6/14)

India Infoline News Service | Mumbai |

HCL Tech's Q3 F6/14 dollar revenues came in line with our expectation at US$1.36bn.

CMP Rs1,425, Target Rs1,627, Upside 14.2%
  • Dollar revenue growth in-line with expectations; revival in software services and continuance of deal win momentum was heartening 

  • Growth lopsided within verticals and geographies; client mining and shift towards FP/Managed Services contracts continued

  • Operational efficiencies drive smart margin expansion; robust profit growth

  • Incremental re-rating could halt; however still undemanding valuation and high growth visibility makes HCL Tech one of our preferred picks in IT

Result table
(Rs mn) Q3 F6/14 Q2 F6/14 % qoq Q3 F6/13 % yoy
Net sales 83,490 81,840 2.0 64,247 30.0
Operating profit 22,320 21,250 5.0 14,393 55.1
OPM (%) 26.7 26.0 77 bps 22.4 433 bps
Depreciation (1,720) (1,850) (7.0) (1,634) 5.3
Other income (70) (470) (85.1) 888 -
PBT 20,530 18,930 8.5 13,647 50.4
Tax (4,290) (3,980) 7.8 (3,249) 32.0
Effective Tax Rate (%) 20.9 21.0 - 23.8 -
Reported PAT 16,240 14,950 8.6 10,398 56.2
PAT margin (%) 19.5 18.3 118 bps 16.2 327 bps
EPS (Rs) 23.2 21.4 8.6 14.9 56.2
Source: Company, India Infoline Research

Dollar revenue growth in-line with expectations; revival in software services and continuance of deal win momentum was heartening 

HCL Tech's Q3 F6/14 dollar revenues came in line with our expectation at US$1.36bn. In constant currency (CC) terms, revenue growth was healthy at 3% qoq. Infrastructure management business continued to clock solid growth of 5% qoq (revenue share increased to 34%) while growth improvement in core software services (61% of revenues) was sustained aided by strong traction in more discretionary enterprise application services (4.2% qoq). After jumping 11.4% qoq in the previous quarter, BPO revenues of the company declined by 1.3% qoq. Impressive deal win momentum continued with the company signing 12 transformational deals of over US$1bn+ TCV (for sixth consecutive quarter). Infrastructure services continue to drive the deal win momentum; BFSI and Manufacturing verticals led the wins in US and Europe.

Growth lopsided within verticals and geographies; client mining and shift towards FP/Managed Services contracts continued

While US revenues were nearly flat on sequential basis, Europe and Asia Pacific regions grew strongly by 4.8% qoq and 10.4% qoq respectively. Within verticals, public services and BFSI grew by robust 14% qoq and 6.4% qoq respectively whereas Telecom de-grew by 3% qoq. Top 20 clients grew faster than the company for the fourth consecutive quarter indicating wallet share gains within key clients. HCL Tech added 2 clients each in US$30mn+ and US$50mn+ LTM revenue buckets. Revenue share of fixed priced/managed services contracts (includes outcome-based pricing) further increased to 55.7% qoq; it has risen by almost 10ppt over the past nine quarters. 

Operational efficiencies drive smart margin expansion; robust profit growth

The Q3 F6/14 consolidated operating margin for HCLT was significantly better than expected. Against our estimate of 25.5%, company delivered an OPM of 26.7%. Continuance of growth momentum enabled sustenance of higher utilization at 84.2% whereas company continued to extract operational efficiencies from fixed priced/managed services contracts. Further, SG&A leverage contributed 40bps towards margin expansion and the ratio fell to 12.1% which is a multi-quarter low. LTM attrition inched-up further to 16.9% and therefore quantum of wage hike would be pivotal to its evolution in coming quarters. Yoy growth in net profit was robust at 59% aided by substantial margin gain. 

Incremental re-rating could halt but still undemanding valuation and high growth visibility makes HCL Tech one of the preferred picks in the sector

HCL Tech's Q3 F6/14 operational performance was much stronger than expected with impressive show on margin front. Though operating efficiencies would continue, operating margin is likely to come-off significantly in the near term on account of implementation of wage hikes, higher visa related expenses and rupee appreciation so far. Revenue growth outlook for the company remains one of the best in the industry with strong deal win momentum continuing. Having witnessed substantial earnings upgrade and an acute valuation re-rating over the past 12 months, we are likely to see a halt on both fronts with further steep rupee appreciation acting as the key risk. However, HCL Tech still remains one of our preferred picks in the sector given its undemanding valuation at 12.3x FY16 P/E and high growth visibility. Retain BUY with 9-12 month price target of Rs1,627. 


Financial Summary
Y/e 30 Jun (Rs m) F6/13 F6/14E F6/15E F6/16E
Revenues 257,337 329,505 373,985 440,704
yoy growth (%) 22.4 28.0 13.5 17.8
Operating profit 58,357 86,610 94,612 110,412
OPM (%) 22.7 26.3 25.3 25.1
Reported PAT 40,950 61,205 69,076 81,282
yoy growth (%) 62.1 49.5 12.9 17.7
       
EPS (Rs) 58.9 87.5 98.8 116.2
P/E (x) 24.2 16.3 14.4 12.3
Price/Book (x) 7.6 5.5 4.2 3.3
EV/EBITDA (x) 16.4 10.6 9.1 7.3
RoE (%) 35.8 39.5 33.4 30.6
RoCE (%) 41.0 45.4 39.7 37.2
Source: Company, India Infoline Research

***Note: This is a NSE Chart

 

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