1QFY2018 Result Update | IT
July 28, 2017
HCL Technologies
BUY
CMP
`891
Performance Highlights
Target Price
`1,014
(` cr) - Consl.
1QFY18
4QFY17
% chg (qoq)
1QFY17
% chg (yoy)
Investment Period
12 Months
Net revenue
12,149
12,053
0.8
11,336
7.2
Stock Info
EBIT
2,445
2,416
1.2
2,333
4.8
EBIT margin (%)
20.1
20.0
8bp
20.6
(46)ps
Sector
IT
PAT
2,171
2,325
(6.6)
2,047
6.1
Market Cap (` cr)
1,27,209
Source: Company, Angel Research
Net Debt (` cr)
(12140)'
For 1QFY2018, HCL Tech posted results below expectations on sales front, while EBIT
Beta
0.4
and net profit came in higher than expected. The sales came in at US$1,884mn (v/s.
52 Week High / Low
910/731
US$1,891mn expected) v/s. US$1,817mn in 4QFY2017, a qoq growth of 3.7% qoq.
Avg. Daily Volume
1,44,465
Revenue in Constant Currency (CC) terms was up 2.6% qoq. The EBIT margin came in
Face Value (`)
2
at 20.1% (v/s. 19.5% expected) v/s. 20.0% in 4QFY2017, a qoq expansion of 8bps.
BSE Sensex
32,382
Thus, PAT came in at `2,171cr (v/s. `2,101cr expected) v/s. `2,325cr in 4QFY2017, a
Nifty
10,021
qoq dip of 6.6%. In terms of guidance, the company has re-iterated that FY2018
Reuters Code
HCLT.BO
revenues are expected to grow between 10.5-12.5% in CC, while Operating Margin
Bloomberg Code
[email protected]
(EBIT) is expected to be in the range of 19.5-20.5%. We maintain our Buy rating.
Quarterly highlights: The sales came in at US$1,884mn (v/s. US$1,891mn expected)
v/s. US$1,817mn in 4QFY2017, a qoq growth of 3.7% qoq. Revenue in Constant
Shareholding Pattern (%)
Currency was up 2.6% qoq. The growth in terms of geography was driven by the USA
Promoters
59.9
and ROW, which posted a qoq CC growth of 3.8% and 3.1% respectively. Europe on
MF / Banks / Indian Fls
11.0
the other hand posted a CC qoq dip of 0.4%. In terms of the services, it was
FII / NRIs / OCBs
26.0
Engineering and R&D Services which posted a CC qoq of 7.9%. In terms of verticals,
Indian Public / Others
3.1
the financial services posted a qoq CC growth of 5.3%; Life sciences & Healthcare
posted a qoq CC growth of 4.8%, while Retail & CPG posted a qoq CC growth of
4.9%. On the operating profit front, the EBIT came in at 20.1% (v/s. 19.5% expected)
Abs.(%)
3m
1yr
3yr
v/s. 20.0% in 4QFY2017, a qoq expansion of 8bps. Thus, PAT came in at `2,171cr
Sensex
8.1
15.7
24.6
(v/s. `2,101cr expected) v/s. `2,325cr in 4QFY2017, a qoq dip of 6.6%.
HCL Tech
8.8
19.7
10.5
Outlook and valuation: We expect HCL Tech to post a USD and INR revenue CAGR of
10.7% and 10.7% respectively over FY2017-19E. On the back of strong order book and
given the attractive valuations, we recommend a Buy on the stock.
3-year price chart
Key financials (Consolidated, US GAAP)
Y/E March (` cr)
FY2016
FY2017
FY2018E
FY2019E
Net sales
30,781
46,723
52,342
57,053
% chg
(16.9)
51.8
12.0
9.0
Net profit
5,643
8,457
8,860
9,536
% chg
(22.2)
49.9
4.8
7.6
EBITDA margin (%)
21.5
22.1
20.9
20.9
EPS (`)
40.0
60.0
62.8
67.6
P/E (x)
22.3
14.9
14.2
13.2
P/BV (x)
4.5
3.8
3.2
2.7
Source: Company, Angel Research
RoE (%)
20.1
25.3
22.4
20.6
Sarabjit kour Nangra
RoCE (%)
15.6
20.4
18.3
17.3
+91 22 3935 7800 Ext: 6806
EV/Sales (x)
3.8
2.5
2.1
1.8
[email protected]
EV/EBITDA (x)
17.6
11.1
10.0
8.7
Source: Company, Angel Research; Note: CMP as of July 26, 2017
Please refer to important disclosures at the end of this report
1
HCL Technologies | 1QFY2018 Result Update
Exhibit 1: 1QFY2018 performance (Consolidated, US GAAP)
Y/E March (` cr)
1QFY18
4QFY17
% chg (qoq)
1QFY17
% chg (yoy)
FY17
FY16
% chg(yoy)
Net revenue
12,149
12,053
0.8
11,336
7.2
46,723
40,913
14.2
Cost of revenue
8,057
7,987
0.9
7,440
8.3
30,890
26,901
14.8
Gross profit
4,092
4,066
0.6
3,896
5.0
15,833
14,012
13.0
SG&A expense
1,411
1,417
(0.4)
1,375
2.6
5,524
5,217
5.9
EBITDA
2,681
2,649
1.2
2,521
6.3
10,309
8,795
17.2
Dep. and
236
233
1.3
188
25.5
835
569
46.7
amortization
EBIT
2,445
2,416
1.2
2,333
4.8
9,474
8,226
15.2
Other income
269
215
25.1
253
6.3
934
1,009
(7.4)
PBT
2,714
2,631
3.2
2,586
4.9
10,408
9,235
12.7
Income tax
543
303
79.2
543
-
1,952
1,883
3.7
PAT
2,171
2,325
(6.6)
2,047
6.1
8,456
7,352
15.0
Forex gain/(loss)
-
-
-
-
-
-
Adjusted PAT
2,171
2,325
(6.6)
2,047
6.1
8,456
7,352
15.0
EPS
15.4
16.5
(6.6)
14.5
6.1
60.0
52.1
15.0
Gross margin (%)
33.7
33.7
(5)bp
34.4
(69)bps
33.9
34.2
(36)bp
EBITDA margin (%)
22.1
22.0
9bp
22.2
(17)bps
22.1
21.5
57bp
EBIT margin (%)
20.1
20.0
8bp
20.6
(46)ps
20.3
20.1
17bp
PAT margin (%)
17.9
19.3
(142)bp
18.1
(19)bps
18.1
18.0
13bp
Source: Company, Angel Research, Note-FY2016 is 12month results for meaningful comparison, From FY2017, company has March ending company
Exhibit 2: 1QFY2018 - Actual Vs Angel estimates
(` cr)
Actual
Estimate
Variation (%)
Net revenue
12,149
12,208
(0.5)
EBIDTA margin (%)
22.1
21.4
67bp
PAT
2,171
2,101
3.3
Source: Company, Angel Research
Sales just in-line with expectation
The sales, came in at US$1,884mn (v/s. US$1,891mn expected) v/s. US$1,817mn
in 4QFY2017, a qoq growth of 3.7% qoq. In Rupee terms, the sales came in at
`12,149 (v/s. `12,208cr expected) v/s. `12,053cr in 4QFY2017, a qoq growth of
0.8%. Revenue in Constant Currency was up 2.6% qoq.
The growth in terms of geography was driven by the USA and ROW, which posted
a qoq CC growth of 3.8% and 3.1% respectively. Europe on the other hand posted
a CC qoq dip of 0.4%. In terms of the services, it was Engineering and R&D
Services which posted a CC qoq of 7.9%. In terms of verticals, the financial
services posted a qoq CC growth of 5.3%, Life sciences & Healthcare posted a qoq
CC growth of 4.8%, while Retail & CPG posted a qoq CC growth of 4.9%.
July 28, 2017
2
HCL Technologies | 1QFY2018 Result Update
Exhibit 3: Revenue growth trend
Source: Company, Angel Research
In terms of services, Engineering & R&D services (which constituted 21.5% of sales)
posted a growth of 7.9% qoq (CC), while Application services (accounting for
36.3% of sales) grew by 1.6% qoq (CC). Infrastructure services, another important
segment of the company, which contributes around 38.6% to overall sales, posted
a growth of 1.7% qoq (CC). Business services, which constituted 3.6% of sales, de-
grew by 6.7% qoq (CC).
Exhibit 4: Revenue growth trend (Service wise)
% of revenue
% growth CC (qoq)
% growth (yoy)
Application services
36.3
1.6
6.3
Infrastructure services
38.6
1.7
22.7
Business services
3.6
(6.7)
(10.6)
Engineering and R&D services
21.5
7.9
19.4
Source: Company, Angel Research
Industry segment wise, the company’s Financial Services vertical (contributing
24.9% to revenue) posted a 5.3% qoq growth in CC terms. The Manufacturing
vertical (contributing 34.9% to revenue) posted a 3.3% qoq growth in CC terms.
Public services, Life sciences & Healthcare, and Telecommunication, Media,
Publishing & Entertainment reported a qoq growth of (2.7)%, 4.8% and (2.5)%, all
in CC terms, respectively. Retail & CPG (contributing 9.5% of the revenue), on the
other hand, reported a growth of 4.9% qoq CC terms during the quarter.
July 28, 2017
3
HCL Technologies | 1QFY2018 Result Update
Exhibit 5: Revenue growth trend (Industry wise)
% of revenue
% growth (CC qoq)
% growth (yoy)
Financial services
24.9
5.3
9.3
Manufacturing
34.9
3.3
18.2
Life sciences & Healthcare
11.8
4.8
11.8
Public Services
11.1
(2.7)
22.5
Retail & CPG
9.5
4.9
16.0
Telecom, MPE
7.9
(2.5)
3.4
Source: Company, Angel Research
Among geographies, in CC terms, America grew by 3.8% qoq, RoW grew by 3.1%
qoq, while Europe de-grew by 0.4% qoq, during the period.
Exhibit 6: Revenue growth trend (Geography wise in CC terms)
Source: Company, Angel Research
Hiring and utilization
During the quarter, the overall headcount of HCL Tech increased by 10,752 to
1,17,781 employees. The attrition rate in IT Services inched downwards to 16.2%
(v/s. 16.9% in 4QFY2017) and the blended utilization level of the company inched
up to 86.0% (v/s. 85.7% in 4QFY2017).
Exhibit 7: Hiring trend
Particulars
1QFY17
2QFY17
3QFY17
4QFY17
1QFY18
Technical
98,225
99,897
1,01,154
1,05,547
1,07,029
Support
9,743
9,898
9,938
10,426
10,752
Total employee base
107,968
109,795
1,11,092
1,15,973
1,17,781
Gross addition
10,515
9,083
8,467
10,605
9,462
Net addition
3.072
2,097
3,124
6,178
1,808
Attrition - IT services (LTM) - %
17.8
18.6
17.9
16.9
16.2
Source: Company, Angel Research
July 28, 2017
4
HCL Technologies | 1QFY2018 Result Update
Operating margin better then expectation
On the operating front, the EBDITA margins came in at 22.1% (v/s. 22.0% in
4QFY2017), a qoq expansion of 9bps, while the EBIT margins came in at 20.1%,
a qoq expansion of 8bps. This was against the EBDITA & EBIT margin expectations
of 21.4% & 19.5% respectively.
Exhibit 8: Margin profile
Source: Company, Angel Research
Client pyramid
The company signed
13 transformational deals this quarter. These deals
represented a well-balanced mix across service lines, industry verticals and
geographies. Company added
1 client in the US$50+mn and
2 in the
US$40+mn.
Exhibit 9: Client pyramid
Particulars
1QFY17
2QFY17
3QFY17
4QFY17
1QFY18
US$1mn-5mn
262
245
259
260
259
US$5mn-10mn
84
91
89
93
95
US$10mn-20mn
49
66
64
68
68
US$20mn-30mn
35
32
33
36
34
US$30mn-40mn
16
16
15
15
17
US$40mn-50mn
5
12
14
9
10
US$50mn-100mn
10
13
12
17
17
US$100mn plus
7
7
8
8
8
Source: Company, Angel Research
July 28, 2017
5
HCL Technologies | 1QFY2018 Result Update
Investment arguments
Robust outlook re-titrated for FY2018: On the basis of deals on hand, the
company gave a revenue growth guidance of 10.5-12.5% in CC for FY2018,
which includes a component of inorganic growth, adjusting for which, the organic
growth would be 7.5-9.5% in CC for FY2018. The operating margin (EBIT) for
FY2018 is expected to be in the range of 19.5-20.5%. We expect HCL Tech to post
a USD and INR revenue CAGR of 10.7% and 10.7% respectively, over FY2017-
19E (inclusive of the acquisition of Geometric Software and Volvo deals).
Healthy pipeline: HCL Tech signed 8 transformational deals this quarter, across
service lines and industry verticals. The broad-based business wins were driven by
next-generation integrated offerings - Next-Gen ITO, BEYONDigital, and IoT
WoRKS, reflecting investments in Internet of Things, digital technologies, cloud,
automation and artificial intelligence.
The company signed
13 transformational deals this quarter. These deals
represented a well-balanced mix across service lines, industry verticals and
geographies. Company added
1 client in the US$50+mn and
2 in the
US$40+mn.
Outlook and valuation
On the operating front, HCL Tech’s EBIT margin had been around 19.3% in
FY2017, a dip of 1,000bps over the previous financial year. We expect the EBIT
and PAT to post a 7.9% and 7.1% CAGR respectively over FY2017-19E. At the
current market price, the stock is trading at 14.2x FY2018E and 13.2x FY2019E
EPS. We recommend a Buy, with a price target of `1,014.
Exhibit 10: One-year forward PE (x) chart
Source: Company, Angel Research
July 28, 2017
6
HCL Technologies | 1QFY2018 Result Update
Exhibit 11: Recommendation summary
Company
Reco
CMP
Tgt Price
Upside
FY2019E
FY2019E
FY2017-19E
FY2019E
FY2019E
(`)
(`)
(%)
EBITDA (%)
P/E (x)
EPS CAGR (%)
EV/Sales (x)
RoE (%)
HCL Tech
Accumulate
891
1,014
13.7
20.9
13.2
6.2
1.8
20.6
Infosys
Buy
994
1,179
18.6
26.0
14.3
5.3
2.2
19.6
TCS
Neutral
2,555
-
-
27.6
16.4
7.8
3.1
29.8
Tech Mahindra
Buy
389
533
37.0
15.0
10.2
8.6
1.1
16.3
Wipro
Neutral
290
-
-
20.3
15.2
4.4
1.2
13.4
Source: Company, Angel Research
Company Background
HCL Tech is India's fifth largest IT services company, with over
1,00,000
employees catering to more than 450 clients. The company's service offerings
include Enterprise Application Services (EAS), Custom Applications, Engineering
Research & Development (ERD), and Infrastructure Management Services (IMS). In
December 2008, HCL Tech acquired UK-based SAP consulting company - Axon,
which now contributes
~10% to its consolidated revenue. Recently, during
3QFY2016, the company acquired Geometric Software.
July 28, 2017
7
HCL Technologies | 1QFY2018 Result Update
Profit and loss statement (Consolidated, US GAAP)
Y/E Mar (` cr)
FY2015
FY2016
FY2017
FY2018E
FY2019E
Net sales
37,061
30,781
46,723
52,342
57,053
Cost of revenues
23,798
20,235
30,890
34,598
37,712
Gross profit
13,263
10,546
15,833
17,744
19,341
% of net sales
35.8
34.3
33.9
33.9
33.9
SG&A expenses
4,563
3,940
5,524
6,804
7,417
% of net sales
12.3
12.8
11.8
13.0
13.0
EBITDA
8,700
6,606
10,309
10,939
11,924
% of net sales
23.5
21.5
22.1
20.9
20.9
Depreciation and amort.
451
393
835
935
1085
% of net sales
1.2
1.3
1.8
1.8
1.9
EBIT
8,249
6,213
9,474
10,004
10,839
% of net sales
22.3
20.2
20.3
19.1
19.0
Other income, net
912
756
934
934
934
Profit before tax
9,161
6,969
10,408
10,938
11,773
Provision for tax
1,908
1,364
1,952
2,078
2,237
% of PBT
20.8
19.6
18.8
19.0
19.0
PAT
7,253
5,605
8,457
8,860
9,536
Share from equity invest.
-
-
-
-
-
Forex loss
-
-
-
-
-
ESOP charges
103
38
-
-
-
Reported net profit
7,253
5,643
8,457
8,860
9,536
Fully diluted EPS (`)
51.4
40.0
60.0
62.8
67.6
Note: FY2016 Numbers are 9 month figures
July 28, 2017
8
HCL Technologies | 1QFY2018 Result Update
Balance sheet (Consolidated, US GAAP)
Y/E Mar (` cr)
FY2015
FY2016
FY2017
FY2018E
FY2019E
Cash and cash equivalent
1,352
729
1,317
1,500
1,700
Account receivables, net
6,563
7,721
8,301
9,039
9,853
Unbilled receivables
2,923
3,002
2,501
3,141
3,423
Deposit with banks
9,670
10,587
10,220
14,102
20,059
Deposit (one year with HDFC ltd)
-
-
-
-
-
Invest. securities, available for sale
767
537
1,146
2,250
2,251
Other current assets
2,338
2,410
2,983
3,283
3,583
Total current assets
23,613
24,986
26,468
33,315
40,870
Property and equipment, net
3,820
4,323
4,681
4,981
5,281
Intangible assets, net
5,204
6,419
11,426
11,426
11,426
Deposits with HDFC Ltd.
-
-
-
-
-
Fixed deposits with banks
-
-
-
-
-
Investment securities HTM
8
160
147
147
147
Investment in equity investee
-
-
-
-
-
Other assets
3,066
3,879
3,712
4,780
4,780
Total assets
35,711
39,768
46,432
54,648
62,502
Current liabilities
9,232
9,509
11,148
12,483
13,606
Borrowings
469
973
542
542
542
Other liabilities
1,259
1,264
1,253
2,078
2,078
Total liabilities
10,960
11,745
12,942
15,103
16,226
Minority interest
-
-
-
-
Total stockholder equity
24,751
28,022
33,490
39,545
46,276
Total liab. and stock holder equity
35,711
39,767
46,432
54,648
62,502
Note: FY2016 Numbers are 9 month figures
July 28, 2017
9
HCL Technologies | 1QFY2018 Result Update
Cash flow statement (Consolidated, US GAAP)
Y/E Mar (` cr)
FY2015
FY2016
FY2017
FY2018E FY2019E
Pre tax profit from operations
7,253
5,643
8,457
8,860
9,536
Depreciation
451
393
835
935
1,085
Expenses (deffered)/written off/others
(168)
(48)
(48)
(48)
(48)
Pre tax cash from operations
7,536
5,988
9,244
9,747
10,573
Other income/prior period ad
912
756
934
934
934
Net cash from operations
8,448
6,744
10,178
10,681
11,507
Tax
(1,908)
(1,364)
(1,952)
(2,078)
(2,237)
Cash profits
6,540
5,381
8,226
8,603
9,270
(Inc)/dec in current assets
(1,991)
(1,309)
(653)
(1,677)
(1,396)
Inc/(dec) in current liabilties
1,035
277
1,639
1,335
1,123
Net trade working capital
(956)
(1,033)
987
(342)
(273)
Cashflow from operating activities
5,584
4,348
9,213
8,261
8,998
(Inc)/dec in fixed assets
(674)
(503)
(358)
(300)
(300)
(Inc)/dec in intangibles
(55)
(1,215)
(5,006)
-
-
(Inc)/dec in investments
(1,458)
(687)
(242)
(4,987)
(5,958)
(Inc)/dec in minority interest
-
-
-
-
-
Inc/(dec) in non current liabilities
(203)
5
(11)
-
-
(Inc)/dec in non current assets
(214)
(72)
(573)
(300)
(300)
Cashflow from investing activities
(2,602)
(2,473)
(6,189)
(5,587)
(6,558)
Inc/(dec) in debt
-
-
-
-
-
Inc/(dec) in equity/premium
-
-
-
-
-
ESOP charges
(103)
(103)
(103)
(103)
(103)
Dividends
(1,651)
(2,805)
(2,805)
(2,805)
(2,805)
Others
(208)
2,385
614
1,551
1,969
Cashflow from financing activities
(1,962)
(523)
(2,294)
(1,357)
(939)
Cash generated/(utilised)
331
(623)
587
184
200
Cash at start of the year
1,021
1,352
729
1,317
1,500
Cash at end of the year
1,352
729
1,317
1,500
1,700
Note: FY2016 Numbers are 9 month figures
July 28, 2017
10
HCL Technologies | 1QFY2018 Result Update
Key ratios
Y/E Mar
FY2015
FY2016
FY2017
FY2018E
FY2019E
Valuation ratio (x)
P/E (on FDEPS)
17.3
22.3
14.9
14.2
13.2
P/CEPS
16.3
20.8
13.5
12.8
11.8
P/BVPS
5.1
4.5
3.8
3.2
2.7
Dividend yield (%)
1.6
1.9
1.9
1.9
1.9
EV/Sales
3.1
3.8
2.5
2.1
1.8
EV/EBITDA
13.3
17.6
11.1
10.0
8.7
EV/Total assets
3.2
2.9
2.5
2.0
1.7
Per share data (`)
EPS (Fully diluted)
51.4
40.0
60.0
62.8
67.6
Cash EPS
54.6
42.8
65.9
69.4
75.3
Dividend
14.0
17.0
17.0
17.0
17.0
Book value
175
199
237
280
328
Dupont analysis
Tax retention ratio (PAT/PBT)
0.8
0.8
0.8
0.8
0.8
Cost of debt (PBT/EBIT)
1.1
1.1
1.1
1.1
1.1
EBIT margin (EBIT/Sales)
0.2
0.2
0.2
0.2
0.2
Asset turnover ratio (Sales/Assets)
1.0
0.8
1.0
1.0
0.9
Leverage ratio (Assets/Equity)
1.4
1.4
1.4
1.4
1.4
Operating ROE
29.3
20.0
25.3
22.4
20.6
Return ratios (%)
RoCE (pre-tax)
23.1
15.6
20.4
18.3
17.3
Angel RoIC
34.5
22.4
28.2
27.3
28.3
RoE
29.3
20.1
25.3
22.4
20.6
Turnover ratios (x)
Asset turnover (fixed assets)
10.6
7.6
10.4
10.8
11.1
Receivables days
68
83
78
67
66
Note: FY2016 Numbers are 9 month figures
July 28, 2017
11
HCL Technologies | 1QFY2018 Result Update
Research Team Tel: 022 - 39357800
E-mail: [email protected]
Website: www.angelbroking.com
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Disclosure of Interest Statement
HCL Technologies
1. Financial interest of research analyst or Angel or his Associate or his relative
No
2. Ownership of 1% or more of the stock by research analyst or Angel or associates or relatives
No
3. Served as an officer, director or employee of the company covered under Research
No
4. Broking relationship with company covered under Research
No
Ratings (Based on expected returns
Buy (> 15%)
Accumulate (5% to 15%)
Neutral (-5 to 5%)
over 12 months investment period):
Reduce (-5% to -15%)
Sell (< -15)
July 28, 2017
12