HCL Tech (Q4 F6/14)

India Infoline News Service | Mumbai |

In constant currency (CC) terms, HCL Tech’s Q4 F6/14 dollar revenues grew by 2.8% qoq, lower than our expectation of 3.5% qoq.

CMP Rs1,559, Target Rs1,820, Upside 16.7% 
  • Dollar revenue growth behind expectations, mix also disappoints; but robust deal win momentum continues

  • Growth lopsided within verticals and geographies; non-Top 20 clients drive growth this time

  • Operational efficiencies contain margin fall to 40bps qoq; robust growth in net profit aided by higher other income and lower tax rate

  • Q4 F6/14 revenue disappointments to correct in coming quarters; valuation still attractive, Retain BUY

Result table
(Rs mn) Q4 F6/14 Q3 F6/14 % qoq Q4 F6/13 % yoy
Net sales

84,240

83,490 0.9 69,800 20.7
Operating profit 22,160 22,320 (0.7) 16,150 37.2
OPM (%) 26.3 26.7 (43) bps 23.1 317 bps
Depreciation (1,770) (1,720) 2.9 (1,700) 4.1
Other income 1,580 (70) (2,357.1) 770 -
PBT 21,970 20,530 7.0 15,220 44.3
Tax (3,620) (4,290) (15.6) (3,300) 9.7
Effective Tax Rate (%) 16.5 20.9 - 21.7 -
Reported PAT 18,350 16,239 13.0 11,922 53.9
PAT margin (%) 21.8 19.5 233 bps 17.1 470 bps
EPS (Rs) 26.3 23.2 13.0 17.1 53.9
Source: Company, India Infoline Research

Dollar revenue growth behind expectations, mix also disappoints; but robust deal win momentum continues

In constant currency (CC) terms, HCL Tech’s Q4 F6/14 dollar revenues grew by 2.8% qoq, lower than our expectation of 3.5% qoq. A bigger surprise came from the mix with growth in infrastructure management business (IMS) materially moderating to 3.1% qoq (5%+ qoq in Q3 F6/14 and 8% CQGR over previous eight quarters) and BPO revenues jumping 17% qoq. Growth in core software services (60% of total revenues) was muted at 2.2% qoq impacted by weakness in enterprise application services (-0.2% qoq). However, engineering and R&D services witnessed a revival in growth (up 3.7% qoq). Impressive deal win momentum continued with the company signing multiple transformational engagements of over US$1bn+ TCV (for seventh consecutive quarter). Execution of the increasing order backlog should resurrect growth momentum of 5%+ qoq in IMS.

For the full year F6/14, HCL Tech’s dollar revenues grew by 14.4% yoy, marginally better than the industry. IMS remained the main growth driver with the business expanding by 30%+ yoy for the second consecutive year. Growth in core software services remained lackluster at 6% yoy. In F6/14, company signed 50+ large/complex deals aggregating US$5bn+ in TCV (nearly equivalent to the annual revenues) which were well-distributed across all service lines and geographies. Given huge deal backlog, increasing pipeline and improving win rate, we believe that HCL Tech would continue to outperform industry growth in F6/15 and F6/16. In our view, incremental participation of core software services in overall growth would also start to improve from coming quarters. 


Growth lopsided within verticals and geographies; non-Top 20 clients drive growth this time

Regionally, while growth in US remained muted at 1.3% qoq, Europe grew at a robust pace (6.5% qoq) for a third straight quarter. Vertical-wise, BFSI continued to grow strongly (8% qoq) while Manufacturing de-grew (-2.4% qoq) after having witnessed good traction over the past several quarters. Revenues in the Telecom & MPE vertical bounced back strongly growing by 9.5% qoq. After driving growth from Top 20 clients in the preceding four quarters (CQGR of 4.5% v/s 3.4% for the company), HCL Tech witnessed stronger growth is relatively smaller accounts (Non-Top 20 clients grew faster by 4% qoq). This was also manifested in five more clients graduating to US$30mn+ annual revenue buckets. Revenue share of fixed priced/managed services contracts (includes outcome-based pricing) further increased to 56.5%; it has risen by ~4ppt over past four quarters and ~14ppt over the past three years. This could be associated with the sharp increase in IMS revenue share. 

Operational efficiencies contain margin fall to 40bps qoq; robust growth in net profit

The Q4 F6/14 consolidated operating margin for HCLT was significantly better than expected. Against our estimate of 25.7%, company delivered an OPM of 26.3% representing a restrained decline of 40bps qoq despite material headwinds of rupee appreciation and higher visa costs. Continuance of growth momentum and frugal hiring enabled sustenance of higher utilization at 84.5% whereas company continued to extract operational efficiencies from fixed priced/managed services contracts (especially on the IMS side). Further, SG&A leverage contributed 40bps towards margin resilience and the ratio fell to a multi-quarter low of 11.8%. Company continues to hire in a calibrated fashion (added 1,501 people, 1.7% on Q3 F6/14 base) in an effort to keep employee productivity at elevated levels. While LTM attrition in IT Services was stable at 16.9%, attrition in BPO business further moderated to 5.3% on quarterly basis. We expect HCL Tech to maintain OPM in a tight range of 25-26.5% in coming quarters. Apart from operating resilience, substantially higher other income (lower forex loss and robust treasury income) and lower tax rate (16.5% v/s 20.9% qoq) drove a significantly better-than-expected net profit of Rs18.4bn.

Q4 F6/14 revenue disappointments to correct in coming quarters; valuation still attractive, retain BUY

HCL Tech remains our Top Pick in the IT sector as we believe that revenue related disappointments (lower growth and lopsided mix) witnessed in Q4 F6/14 would correct in ensuing quarters given strong revenue visibility across service lines. Further, company has demonstrated impressive operational performance over the past couple of years with its margin now comparable with larger peers. HCL Tech’s absolute valuation is undemanding at 13x FY16 P/E; also its relative valuation is attractive when compared to peers having similar strong revenue growth visibility. Retain BUY rating and upgrade 9-12 month price target to Rs1,820.


Financial Summary
Y/e 30 Jun (Rs m) F6/13 F6/14E F6/15E F6/16E
Revenues 257,337 329,180 360,882 418,889
yoy growth (%) 22.4 27.9 9.6 16.1
Operating profit 58,357 86,670 92,744 106,515
OPM (%) 22.7 26.3 25.7 25.4
Reported PAT 40,950 63,710 71,520 82,080
yoy growth (%) 64.3 57.9 12.3 14.8
         
EPS (Rs) 58.9 91.1 102.3 117.4
P/E (x) 26.5 17.1 15.2 13.3
Price/Book (x) 8.3 5.9 4.5 3.5
EV/EBITDA (x) 18.0 11.6 10.3 8.4
RoE (%) 35.8 40.7 33.8 30.1
RoCE (%) 41.0 46.1 39.9 36.4
Source: Company, India Infoline Research

***Note: This is a NSE Chart

 

Advertisements

  • Save upto Rs.2.67 lakh with Pradhan Mantri Awas Yojana ...Know more
  • Now Save Rs.3150 on your Demat Account ...Click here
  • Now get IIFL Personal Loan in just 8* hours...APPLY NOW!
  • Get the most detailed result analysis on the web - Real Fast!
  • Actionable & Award-Winning Research on 500 Listed Indian Companies.