HCL Technologies (Q3 F6/13)

India Infoline News Service | Mumbai |

HCL Tech’s Q3 F6/13 consolidated dollar revenues grew 3.2% qoq to US$1.191bn, marginally ahead of our expectation of US$1.186bn.

CMP Rs751, Target Rs891, Upside 18.6%

  • Dollar revenues marginally ahead of expectation driven by Infrastructure services business

  • Narrow based growth across business segments; Growth in telecom and enterprise apps better than expected

  • Supported by utilization, OPM remains stable sequentially; Employee base rationalizes marginally

  • Decent deal wins provide sustained revenue visibility; Management commentary comforting; Maintain BUY

Result table
(Rs mn) Q3 F6/13 Q2 F6/13 % qoq Q3 F6/12 % yoy
Net sales 64,247 62,737 2.4 52,156 23.2
Operating profit 14,393 14,166 1.6 9,591 50.1
OPM (%) 22.4 22.6 (18) bps 18.4 401 bps
Depreciation (1,634) (1,722) (5.1) (1,413) 15.6
Other income 888 154 476.6 (136) -
PBT 13,647 12,598 8.3 8,042 69.7
Tax (3,249) (2,951) 10.1 (2,016) 61.2
Effective tax rate (%) 23.8 23.4 - 25.1 -
ESOP Charge (207) (202) 2.5 (208) (0.5)
Adjusted PAT 10,191 9,445 7.9 5,818 75.2
Adj. PAT margin (%) 15.9 15.1 81 bps 11.2 471 bps
Reported PAT 10,398 9,647 7.8 6,026 72.6
EPS (Rs) 15.1 14.0 7.8 8.7 72.6
Source: Company, India Infoline Research

Dollar revenues marginally ahead of expectation driven by Infrastructure services business

HCL Tech’s Q3 F6/13 consolidated dollar revenues grew 3.2% qoq to US$1.191bn, marginally ahead of our expectation of US$1.186bn. This was lower than the constant currency revenue growth of 3.8% due to the negative cross currency impact of ~60bps (an extraneous factor). The growth during the quarter was again driven by Infrastructure services business which grew 9% qoq cc. On the other hand, software services growth was tepid at 1.7% qoq cc with volumes growing 0.4% qoq. HCLT’s declared a multi-year transformational deal wins of TCV US$1bn further vindicating its strategy to focus integrated (total IT outsourcing) re-bid deals market.


Narrow based growth across business segments; Growth in telecom and enterprise apps better than expected

The growth for HCLT in Q3 F6/13 was narrow based across verticals, services and geographies. Within verticals the growth was led by Manufacturing (+7.8% qoq) and Telecom (+4.7% qoq). Financial services (+1% qoq), Retail & CPG (-1.4% qoq) and healthcare (-1.6% qoq) were laggards from verticals’ perspective.  Amongst services, growth was driven by Infrastructure (+9% qoq) and enterprise application (+4.4% qoq). On the other hand, software services growth was tepid at 1.7% qoq. Across geographies, Europe led the growth (+6.3% qoq) followed by Americas (+3.6% qoq). The strong growth in telecom and enterprise application were better than expected.

  

This is especially due to the ongoing sluggishness in the telecom vertical as well not so strong discretionary spending environment. Growth amongst clients was driven by Top6-10 clients which grew 4.4% qoq in dollar terms as well as non top 20 clients which grew 4% qoq in dollar terms.

 

Supported by utilization, OPM remain stable sequentially; Employee base rationalizes marginally

The Q3 F6/13 consolidated operating margin for HCLT was largely stable at 22.4%. Within the key business segments, the OPM for software services corrected 50bps qoq to 23.3% as opposed t o an increase in OPM for BPO (+10bps to 11.6%) and Infrastructure services (+50bps to 21.9%).  More specifically, positive impact due to utilization up-tick (+39bps qoq) and higher efficiencies (+7bps qoq) were offset by the negative impact from currency (-11bps) and higher SG&A (-33bps). The strong beat on the other income front (due accretion from the sale of the capital stream business) resulted in PAT coming in ~8% ahead of estimates at Rs10.4bn. There was a net reduction in the consolidated employee base on the back of reduction of 1000 employees in IT services business.  IT services attrition inched up marginally to 14.2% as compared to 13.6% last quarter.


Decent deal wins provide sustained revenue visibility; Management commentary remains constructive; Maintain BUY

Q3 F6/13 was a quarter of strong revenue growth and stable margin performance for HCLT. The robust constant currency growth of 3.8% is expected to second only to TCS driven by ramp-ups of deal wins won in the recent past. New bookings of US$1 bn too was reasonably strong considering the overall weakness in the deal signings as noted by industry analyst ISG. While the management sounded cautious on the piecemeal nature of the discretionary spending, confidence on their strength in the re-bid total IT outsourcing model is comforting. HCLT should continue to ride on its well balanced services portfolio (discretionary and non-discretionary) and benefit from the on-going churn in the re-bid/restructuring deals space. This is evident in the 40% up-tick seen in the deal funnel size as indicated by the management. We marginally increase our estimates post the results and continue to maintain our positive stance and BUY rating on the stock.


Financial Summary
Y/e 30 Jun (Rs m) F6/12 F6/13E F6/14E F6/15E
Revenues 210,312 253,821 283,014 320,950
yoy growth (%) 32.6 20.7 11.5 13.4
Operating profit 40,250 56,834 62,244 70,091
OPM (%) 19.1 22.4 22.0 21.8
Reported PAT 24,553 38,319 40,870 46,227
yoy growth (%) 53.2 56.1 6.7 13.1
         
EPS (Rs) 36.3 56.3 60.1 67.9
P/E (x) 20.7 13.3 12.5 11.1
Price/Book (x) 5.3 4.1 3.2 2.6
EV/EBITDA (x) 12.9 8.6 7.4 6.1
RoE (%) 28.9 34.5 28.9 26.2
RoCE (%) 32.3 39.3 34.2 31.3
Source: Company, India Infoline Research
BSE 879.20 8.80 (1.01%)
NSE 880.00 9.55 (1.10%)

***Note: This is a NSE Chart

 

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