HCL Technologies Ltd (Q2 F6/14)

India Infoline News Service | Mumbai |

HCL Tech’s Q2 F6/14 dollar revenues came in ahead of our expectation at US$1.32bn.

CMP Rs1,391, Target Rs1,575, Upside 13.2%
  • Dollar revenue growth beat expectations; revival in software services and continuance of deal win momentum were key positives

  • Growth mix and quality was also impressive 

  • Operational efficiencies continue to drive resilient margin performance; profit growth was robust

  • Earnings upgrade to follow; valuation re-rating to continue. Maintain BUY

Result table
(Rs mn)
Q2 F6/14
Q1 F6/14
% qoq
Q2 F6/13
% yoy
Net sales
81,840
79,610
2.8
62,737
30.4
Operating profit
21,250
20,930
1.5
14,166
50.0
OPM (%)
26.0
26.3
(30) bps
22.6
340 bps
Depreciation
(1,850)
(1,980)
(6.6)
(1,722)
7.4
Other income
(470)
(1,200)
(60.8)
154
-
PBT
18,930
17,750
6.6
12,598
50.3
Tax
(3,980)
(3,590)
10.9
(2,951)
34.9
Effective Tax Rate (%)
21.0
20.2
-
23.4
-
Reported PAT
14,950
14,160
5.6
9,647
55.0
PAT margin (%)
18.3
17.8
48 bps
15.4
290 bps
EPS (Rs)
21.4
20.3
5.6
13.8
55.0
Source: Company, India Infoline Research

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

HCL Tech’s Q2 F6/14 dollar revenues came in ahead of our expectation at US$1.32bn. In constant currency (CC) terms, revenue growth was respectable at 3% qoq in spite of seasonal headwinds and was materially better than our expectation of 2.3% qoq. The revenue beat was driven by growth revival in core software services segment which grew by reported 2.5% qoq v/s a muted 1% CQGR over the previous five quarters. Company’s BPO revenues jumped by 11% qoq. Slightly disappointing was a lower than expected 4.8% CC revenue growth in infrastructure services which represented a significant moderation from 8%+ CQGR in the previous 5-6 quarters.


Impressive deal win momentum continued with the company signing deals worth over US$1bn+ TCV (for fifth consecutive quarter). Of the 15 transformational deals won across service lines, infrastructure services constituted half of it. BFSI and Manufacturing verticals led the wins and about 80% of overall bookings originated from Fortune 500/Global 2000 customers.


Growth mix and quality was also better

The quality of growth during Q2 F6/14 was better than Q1 F6/14 being more broad-based in nature. While the service mix of growth was encouraging due to higher participation from core software services and BPO, the vertical mix was also better with growth acceleration in Telecom, Retail and Public services verticals. Geography-wise, revenue growth in Europe region improved sharply from 1% qoq in Q1 F6/14 to 5% qoq in Q2 F6/14 in constant currency terms. Robust reported growth of 7.5%+ qoq was witnessed in Top 6-10 clients and Top 11-20 customers which was also manifested in clients adds across most revenue buckets.


Operational efficiencies continue to drive resilient margin performance; robust profit growth

The Q2 F6/14 consolidated operating margin for HCLT was significantly better than expected. Against our estimate of 24.9%, company delivered an OPM of 26%. A reasonably strong revenue growth and efficiencies from fixed priced/managed services (includes outcome-based pricing) contracts largely offsetted the impact of wage hikes. Further, company continued to extract leverage from SG&A cost with the component falling to 12.5%, a multi-quarter low. Blended employee utilization remained firm at 84% while IT services attrition on LTM basis inched up to 16.6%. Yoy growth in net profit was robust at 58% with the figure beating our estimate by Rs1.6bn. 


Earnings upgrade to follow; valuation re-rating to continue. Maintain BUY

HCL Tech’s Q2 F6/14 operational performance was a comprehensive beat both in quantitative and qualitative terms. With strong deal win momentum continuing, revenue growth outlook for the company remains one of the best in the industry. In our view, incremental valuation re-rating in the medium term would be driven by improving mix of growth (lop-sided growth has been a key concern) and sustenance of margin at elevated levels of 25-26% (driven by efficiencies from fixed priced/managed services contracts). We have upgraded our FY14/15 earnings projections significantly and introduced FY16 estimates. Rolling over valuation to FY16, we raise 9-12 month target to Rs1,575. HCL Tech remains one of our preferred picks in the sector.   


Financial Summary
Y/e 30 Jun (Rs m)
F6/13E
F6/14E
F6/15E
F6/16E
Revenues
BSE 890.00 9.25 (1.05%)
NSE 891.80 8.95 (1.01%)

***Note: This is a NSE Chart

 

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