3QFY2018 Result Update | IT

January 22, 2018

HCL Technologies

ACCUMULATE

CMP

`958

Performance Highlights

Target Price

`1,014

(` cr) - Consl.

3QFY18

2QFY18

% chg (qoq)

3QFY17

% chg (yoy)

Net revenue

12,808

12,434

3.0

11,814

8.4

Investment Period

12 Months

EBIT

2,509

2,451

2.4

2,408

4.2

Stock Info

EBIT margin (%)

19.6

19.7

(12)bp

20.4

(79)ps

Sector

PAT

2,194

2,188

0.3

2,070

6.0

Market Cap (` cr)

133,335

Source: Company, Angel Research

Net Debt (` cr)

(12140)'

Beta

0.2

HCL Tech, for 3QFY2018 the sales came in at US$1,988mn (v/s US$1,977mn expected

52 Week High / Low

965/778

Avg. Daily Volume

151,423

and) v/s US$1,929mn in 2QFY2018, registering a qoq growth of 3.1%. In constant

Face Value (`)

Currency (CC) terms, the company posted a qoq growth of 3.3%. On EBIT front, the

BSE Sensex

35,512

company posted an EBIT of 19.6% (v/s 19.7% expected and) v/s 19.7% in 2QFY2018.

Nifty

10,895

Consequently, the PAT came in at `2,194cr (v/s `2,168cr expected and) v/s `2,188cr in

Reuters Code

HCLT.BO

Bloomberg Code

HCLT@IN

2QFY2018, growth of 0.3% qoq. In terms of guidance, the company expects FY'2018

revenues to grow between 10.5-12.5% in Constant Currency. Operating Margin (EBIT)

Shareholding Pattern (%)

for FY’2018 expected from 19.5% to 20.5%. We maintain our accumulate rating,

Promoters

60.1

MF / Banks / Indian Fls

10.5

Quarterly highlights: The sales came in at US$1,988mn (v/s US$1,977mn expected

FII / NRIs / OCBs

26.4

and) s/s US$1,929mn in 2QFY2018, registering a qoq growth of 3.1%. On constant

Indian Public / Others

3.0

Currency (CC) terms, the company posted a qoq growth of 3.3%. In terms of the

geography, the USA posted a qoq 4.9% CC growth, Europe posted a 1.9% qoq CC

Abs.(%)

1yr

3yr

growth & ROW posted a 3.9% CC dip during the quarter. In terms, of the verticals,

Sensex

6.4

30.0

25.7

HCL Tech

13.6

13.5

16.3

Manufacturing, and Retail & CPG were the key growth driver for the company

registering a CC qoq growth of 6.6%. On EBIT front, the company posted an EBIT of

19.6% (v/s 19.7% expected and) v/s 19.7% in 2QFY2017. The margins held up only on

the back of 85.8% capacity utilization v/s 86.0% in 2QFY2018. Consequently, the PAT

3-year price chart

came in at `2,194cr (v/s `2,168cr expected and) v/s `2,188cr in 2QFY2017, a growth of

1,200

0.3% qoq.

1,000

800

Outlook and valuation: We expect HCL Tech to post a USD and INR revenue CAGR of

600

9.7% and 8.2% respectively over FY2017-19E. On the back of strong order book and given

the attractive valuations, we recommend an Accumulate on the stock.

400

200

Key financials (Consolidated, US GAAP)

Y/E March (` cr)

FY2016

FY2017

FY2018E

FY2019E

Net sales

30,781

46,723

50,099

54,608

% chg

(16.9)

51.8

7.2

9.0

Source: Company, Angel Research

Net profit

5,643

8,457

8,857

9,534

% chg

(22.2)

49.9

4.7

7.6

EBITDA margin (%)

21.5

22.1

EPS (`)

40.0

60.0

62.8

67.6

P/E (x)

23.9

16.0

15.3

14.2

P/BV (x)

4.8

4.0

3.4

2.9

RoE (%)

20.1

25.3

22.4

20.6

Sarabjit kour Nangra

15.6

20.4

18.7

17.7

+91 22 3935 7800 Ext: 6806

RoCE (%)

4.0

2.6

2.3

2.0

[email protected]

EV/Sales (x)

EV/EBITDA (x)

18.5

11.7

10.4

9.1

Source: Company, Angel Research; Note: CMP as of January 19, 2018

Please refer to important disclosures at the end of this report

HCL Technologies | 3QFY2018 Result Update

Exhibit 1: 3QFY2018 performance (Consolidated, US GAAP)

Y/E March (` cr)

3QFY18

2QFY18

% chg (qoq)

3QFY17

% chg (yoy)

9MFY18

9MFY17

% chg(yoy)

Net revenue

12,808

12,434

3.0

11,814

8.4

37,391

34,670

7.8

Cost of revenue

8,412

8,208

2.5

7,809

7.7

24,677

24,540

0.6

Gross profit

4,396

4,226

4.0

4,005

9.8

12,714

10,130

25.5

SG&A expense

1,432

1,467

(2.4)

1,377

4.0

4,310

2,352

83.2

EBITDA

2,964

2,759

7.4

2,628

12.8

8,404

7,778

8.0

Dep. and amortization

455

308

47.7

220

106.8

999

569

75.6

EBIT

2,509

2,451

2.4

2,408

4.2

7,405

7,209

2.7

Other income

264

298

(11.4)

231

14.3

831

648

28.2

PBT

2,773

2,749

0.9

2,639

5.1

8,236

7,857

4.8

Income tax

579

561

3.2

568

1.9

1,683

1,662

1.3

PAT

2,194

2,188

0.3

2,070

6.0

6,553

6,195

5.8

Forex gain/(loss)

(61)

Adjusted PAT

2,194

2,188

0.3

2,070

6.0

6,553

6,133

6.8

EPS

15.6

15.5

0.4

14.7

6.0

46.5

43.5

6.8

Gross margin (%)

34.3

34.0

33bp

33.9

42bps

34.0

29.2

478bp

EBITDA margin (%)

23.1

22.2

95bp

22.2

90bps

22.5

22.4

4bp

EBIT margin (%)

19.6

19.7

(12)bp

20.4

(79)ps

19.8

20.8

(99)bp

PAT margin (%)

17.1

17.6

(47)bp

17.5

(39)bps

17.5

17.7

(16)bp

Source: Company, Angel Research

Exhibit 2: 3QFY2018 - Actual Vs Angel estimates

(` cr)

Actual

Estimate

Variation (%)

Net revenue

12,808

12,795

0.1

EBIDTA margin (%)

23.1

23.2

(5.8)bps

PAT

2,194

2,168

1.2

Source: Company, Angel Research

Sales just in line with expectation

The sales came in at US$1,988mn (v/s US$1,977mn expected and) v/s US$1,929mn

in 2QFY2018, registering a qoq growth of 3.1%. In constant Currency (CC) terms,

the company posted a qoq growth of 3.3%. In Rupee terms, revenues came in at

`12,808cr v/s. `12,795cr, up 3.0% qoq.

In terms, of the geography the USA posted a qoq 4.9% CC growth, Europe posted

a 1.9% qoq CC growth & ROW posted a 3.9% CC dip during the quarter.

In terms of the verticals, the Manufacturing, and Retail & CPG were the key growth

driver for the company registering a CC qoq growth of 6.6%. FSI posted qoq growth

of 1.4%, Public Services grew by 0.2% qoq, Life Sciences and Health grew by 2.4%

qoq and Telecommunications, Media, Publishing & Entertainment de-grew by 3.8%

qoq.

January 22 2018

HCL Technologies | 3QFY2018 Result Update

Exhibit 3: Revenue growth trend

2,000

1,900

4.1

1,800

3.7

1,700

3.1

1,600

1,500

2.3

1,400

1,300

1.3

1,200

1,100

1,745

1,817

1,884

1,928

1,988

1,000

3QFY17

4QFY17

1QFY2018

2QFY2018

3QFY18

Revenue (USD)

qoq growth (%)

Source: Company, Angel Research

In terms of services, Engineering & R&D services (which constituted 24.2% of sales)

posted a growth of 13.6% qoq (CC), while Application services (accounting for

35.3% of sales) grew by 1.6% qoq (CC). Infrastructure services, another important

segment of the company, which contributes around 36.7% to overall sales, posted

de-growth of 1.2% qoq (CC). Business services, which constituted 3.7% of sales,

grew by 5.0% qoq (CC).

Exhibit 4: Revenue growth trend (Service wise)

% of revenue

% growth CC (qoq) % growth (yoy)

Application services

35.3

1.6

4.4

Infrastructure services

36.7

(1.2)

1.6

Business services

3.7

5.0

1.2

Engineering and R&D services

24.2

13.6

47.7

Source: Company, Angel Research

Industry segment wise, the company’s Financial Services vertical (contributing

24.6% to revenue) posted a 1.4% qoq growth in CC terms. The Manufacturing

vertical (contributing 36.5% to revenue) posted a 6.6% qoq growth in CC terms.

Public services, Life Sciences & Healthcare, and Telecommunication, Media,

Publishing & Entertainment reported a qoq growth of 0.2%, 2.4% and (3.8) %

respectively, all in CC terms. Retail & CPG (contributing 9.6% of the revenue), on

the other hand, reported growth of 6.6% qoq in CC terms during the quarter.

January 22 2018

HCL Technologies | 3QFY2018 Result Update

Exhibit 5: Revenue growth trend (Industry wise)

% of revenue

% growth (CC qoq)

% growth (yoy)

Financial services

24.6

1.4

10.6

Manufacturing

36.5

6.6

21.0

Life sciences & Healthcare

11.7

2.4

9.7

Public Services

10.2

0.2

1.0

Retail & CPG

9.6

6.6

13.1

Telecom, MPE

7.4

(3.8)

(6.8)

Source: Company, Angel Research

Among geographies, in CC terms, America grew by 4.9% qoq, RoW de-grew by

3.9% qoq, and Europe grew 1.9% qoq during the period.

Exhibit 6: Revenue growth trend (Geography wise in CC terms)

15.8

6.8

3.8

4.9

1.9

5.3

(

0.4)

4.4

1.7

3.1

(3.0)

(3)

(0.5)

(6)

(9)

(12.0)

(3.9)

(12)

(15)

3QFY17

4QFY17

1QFY2018

2QFY2018

3QFY18

Europe

Rest of the world

Source: Company, Angel Research

Hiring and utilization

During the quarter, the overall headcount of HCL Tech increased by 10,460 to

1,19,291 employees. The attrition rate in IT Services inched downwards to 15.2%

(v/s. 15.7% in 3QFY2018) and the blended utilization level of the company remained

stagnant at 85.8% (86.0% in 2QFY2018).

Exhibit 7: Hiring trend

Particulars

3QFY17 4QFY17 1QFY18

2QFY18

3QFY18

Technical

1,01,154

1,05,547

1,07,029

1,08,351

1,08,831

Support

9,938

10,426

10,752

10,689

10,460

Total employee base

1,11,092

1,15,973

1,17,781

1,19,040

1,19,291

Gross addition

8,467

10,605

9,462

8,645

7,113

Net addition

3,124

6,178

1,808

1,259

251

Attrition - IT services (LTM) - %

17.9

16.9

16.2

15.7

15.2

Source: Company, Angel Research

January 22 2018

HCL Technologies | 3QFY2018 Result Update

Operating margin better than expectation

On the operating front, the EBDITA margins came in at 23.1% (v/s. 22.2% in

2QFY2018), a qoq expansion of 95bps, while the EBIT margins came in at 19.6%, a

qoq dip of 12bps. This was against the EBDITA margin expectations of 23.0%

mainly on account of an increase of 100bp in depreciation and amortization

expense.

Exhibit 8: Margin profile

34.0

34.3

33.9

33.7

23.1

22.2

22.0

22.1

22.2

20.0

20.1

20.4

19.7

19.6

3QFY17

4QFY17

1QFY18

2QFY18

3QFY18

Gross margin

EBITDA margin

EBIT margin

Source: Company, Angel Research

Client pyramid

The company signed

20 transformational deals this quarter. These deals

represented a well-balanced mix across service lines, industry verticals and

geographies. Company added 3 clients each in the US$5+ mn and US$40+ mn

categories.

Exhibit 9: Client pyramid

Particulars

3QFY17

4QFY17

1QFY18

2QFY18

3QFY18

US$1mn-5mn

259

260

259

277

291

US$5mn-10mn

102

105

US$10mn-20mn

US$20mn-30mn

US$30mn-40mn

US$40mn-50mn

US$50mn-100mn

US$100mn plus

Source: Company, Angel Research

January 22 2018

HCL Technologies | 3QFY2018 Result Update

Investment arguments

Robust outlook re-iterated for FY2018: On the basis of deals on hand, the

company gave a revenue growth guidance of 10.5-12.5% in CC terms for FY2018,

which includes a component of inorganic growth, adjusting for which, the organic

growth would be in the range of 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 9.7% and 8.2% respectively, over FY2017-

19E (inclusive of the acquisition of Geometric Software and Volvo deal).

Healthy pipeline: HCL Tech signed 20 transformational deals this quarter, across

service lines and industry verticals. The broad-based business wins were driven by

next-generation integrated offerings or Next-Gen ITO, BEYONDigital, and IoT

WoRKS, reflecting investments in Internet of Things, digital technologies, cloud,

automation and artificial intelligence. Company added 3 clients each in the US$5+

mn and US$40+ mn categories.

Outlook and valuation

We expect the EBIT and PAT to post 7.7% and 6.2% CAGR respectively over FY2017-

19E. At the current market price, the stock is trading at 15.3x FY2018E and 14.2x

FY2019E EPS. We recommend a Buy on the stock, with a Target Price of `1,014.

Exhibit 10: One-year forward PE (x) chart

1,200

1,000

800

600

400

200

Price

18x

15x

12x

Source: Company, Angel Research

Exhibit 11: Recommendation summary

Company

Reco

CMP Tgt Price Upside

FY2019E

FY2017-19E

FY2019E

(`)

(%)

EBITDA (%)

P/E (x)

EPS CAGR (%) EV/Sales (x)

RoE (%)

HCL Tech

Accumulate

958

1,014

5.9

22.1

14.2

6.2

1.9

20.6

Infosys

Neutral

1150

26.5

17.1

3.8

2.8

18.7

TCS

Sell

3,113

2,493

(19.9)

26.3

21.2

3.4

4.0

28.3

Tech Mahindra Reduce

570

526

(7.7)

15.0

15.1

8.6

1.4

16.2

Wipro

Reduce

321

280

(12.7)

22.3

16.5

4.4

1.9

13.6

Source: Company, Angel Research

January 22 2018

HCL Technologies | 3QFY2018 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

50,099

54,608

Cost of revenues

23,798

20,235

30,890

33,116

36,096

Gross profit

13,263

10,546

15,833

16,984

18,512

% of net sales

35.8

34.3

33.9

SG&A expenses

4,563

3,940

5,524

5,912

6,444

% of net sales

12.3

12.8

11.8

EBITDA

8,700

6,606

10,309

11,072

12,068

% of net sales

23.5

21.5

22.1

Depreciation and amort.

451

393

835

935

1085

% of net sales

1.2

1.3

1.8

1.9

2.0

EBIT

8,249

6,213

9,474

10,137

10,983

% of net sales

22.3

20.2

20.3

20.2

20.1

Other income, net

912

756

934

Profit before tax

9,161

6,969

10,408

11,071

11,917

Provision for tax

1,908

1,364

1,952

2,214

2,383

% of PBT

20.8

19.6

18.8

20.0

PAT

7,253

5,605

8,457

8,857

9,534

Share from equity invest.

Forex loss

ESOP charges

103

Reported net profit

7,253

5,643

8,457

8,857

9,534

Fully diluted EPS (`)

51.4

40.0

60.0

62.8

67.6

Note: FY2016 Numbers are 9 month figures

January 22 2018

HCL Technologies | 3QFY2018 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

1,484

1,680

Account receivables, net

6,563

7,721

8,301

8,652

9,431

Unbilled receivables

2,923

3,002

2,501

3,006

3,276

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

32,778

40,281

Property and equipment, net

3,820

4,323

4,681

4,981

5,281

Intangible assets, net

5,204

6,419

11,426

Deposits with HDFC Ltd.

Fixed deposits with banks

Investment securities HTM

160

147

Investment in equity investee

Other assets

3,066

3,879

3,712

4,780

Total assets

35,711

39,768

46,432

54,110

61,914

Current liabilities

9,232

9,509

11,148

11,948

13,023

Borrowings

469

973

542

Other liabilities

1,259

1,264

1,253

2,078

Total liabilities

10,960

11,745

12,942

14,568

15,643

Minority interest

Total stockholder equity

24,751

28,022

33,490

39,542

46,271

Total liab. and stock holder equity

35,711

39,767

46,432

54,110

61,914

Note: FY2016 Numbers are 9 month figures

January 22 2018

HCL Technologies | 3QFY2018 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

8,857

9,534

Depreciation

451

393

835

935

1,085

Expenses (deffered)/written off/others

(168)

(48)

Pre tax cash from operations

7,536

5,988

9,244

9,744

10,571

Other income/prior period ad

912

756

934

Net cash from operations

8,448

6,744

10,178

10,678

11,505

Tax

(1,908)

(1,364)

(1,952)

(2,214)

(2,383)

Cash profits

6,540

5,381

8,226

8,464

9,121

(Inc)/dec in current assets

(1,991)

(1,309)

(653)

(1,156)

(1,349)

Inc/(dec) in current liabilties

1,035

277

1,639

800

1,075

Net trade working capital

(956)

(1,033)

987

(355)

(274)

Cashflow from operating activities

5,584

4,348

9,213

8,108

8,848

(Inc)/dec in fixed assets

(674)

(503)

(358)

(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)

(11)

(Inc)/dec in non current assets

(214)

(72)

(573)

(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)

Dividends

(1,651)

(2,805)

Others

(208)

2,385

614

1,703

2,103

Cashflow from financing activities

(1,962)

(523)

(2,294)

(1,205)

(805)

Cash generated/(utilised)

331

(623)

587

168

196

Cash at start of the year

1,021

1,352

729

1,317

1,484

Cash at end of the year

1,352

729

1,317

1,484

1,680

Note: FY2016 Numbers are 9 month figures

January 22 2018

HCL Technologies | 3QFY2018 Result Update

Key ratios

Y/E Mar

FY2015

FY2016

FY2017 FY2018E FY2019E

Valuation ratio (x)

P/E (on FDEPS)

18.6

23.9

16.0

15.3

14.2

P/CEPS

17.5

22.4

14.5

13.8

12.7

P/BVPS

5.5

4.8

4.0

3.4

2.9

Dividend yield (%)

1.5

1.8

EV/Sales

3.3

4.0

2.6

2.3

2.0

EV/EBITDA

14.0

18.5

11.7

10.4

9.1

EV/Total assets

3.4

3.1

2.6

2.1

1.8

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

Book value

175

199

237

280

328

Dupont analysis

Tax retention ratio (PAT/PBT)

0.8

Cost of debt (PBT/EBIT)

1.1

EBIT margin (EBIT/Sales)

0.2

Asset turnover ratio (Sales/Assets)

1.0

0.8

1.0

0.9

Leverage ratio (Assets/Equity)

1.4

1.3

Operating ROE

29.3

20.0

25.3

22.4

20.6

Return ratios (%)

RoCE (pre-tax)

23.1

15.6

20.4

18.7

17.7

Angel RoIC

34.5

22.4

28.2

28.1

29.1

RoE

29.3

20.1

25.3

22.4

20.6

Turnover ratios (x)

Asset turnover (fixed assets)

10.6

7.6

10.4

10.6

Receivables days

Note: FY2016 Numbers are 9 month figures

January 22 2018

HCL Technologies | 3QFY2018 Result Update

Research Team Tel: 022 - 39357800

E-mail: [email protected]

Website: www.angelbroking.com

DISCLAIMER

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offering of securities of the company covered by Analyst during the past twelve months.

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Disclosure of Interest Statement

HCL Technologies

1. Financial interest of research analyst or Angel or his Associate or his relative

2. Ownership of 1% or more of the stock by research analyst or Angel or associates or relatives

3. Served as an officer, director or employee of the company covered under Research

4. Broking relationship with company covered under Research

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)

January 22 2018