2QFY2017 Result Update | IT
October 25, 2016
HCL Technologies
BUY
CMP
`811
Performance Highlights
Target Price
`1,000
(` cr) - Consl.
2QFY17 1QFY17
% chg (qoq) 2QFY16
% chg (yoy)
Investment Period
12 Months
Net revenue
11,519
11,336
1.6
10,097
14.1
EBIT
2,318
2,333
(0.6)
1,957
18.4
Stock Info
Adj. EBITDA margin (%)
20.1
20.6
(46)bps
19.4
74bps
Sector
IT
PAT
2,014
2,047
(1.6)
1,726
16.7
Market Cap (` cr)
114,383
Source: Company, Angel Research
Net Debt (` cr)
(101,878)
HCL Technologies (HCL Tech) announced its results and they are more or less in
Beta
0.6
line with expectations. The company posted a 1.9% sequential growth in USD
52 Week High / Low
890/707
revenues to US$1,722mn (V/s US$1,726mn expected and V/s US$1,691mn in
Avg. Daily Volume
195,755
1QFY2017). On Constant Currency (CC) basis, the company posted a revenue
Face Value (`)
2
growth of 2.8% qoq. The EBIT margins came in at 20.1% (V/s 20.0% expected), a
BSE Sensex
28,179
dip of ~46bp qoq. Consequently, the PAT came in at `2,014cr (V/s `1,979cr), a
Nifty
8,709
dip of 1.6% qoq. For FY2017, the company gave a revenue growth guidance of
Reuters Code
HCLT.BO
12.0-14.0% in CC terms, which translates into an 11.2% to 13.2% growth in US$
Bloomberg Code
[email protected]
terms. The operating margin (EBIT) for FY’2017 is expected to be in the range of
19.5% to 20.5%. We maintain our Buy rating on the stock.
Quarterly highlights: For 2QFY2017, the company posted a 1.9% sequential
Shareholding Pattern (%)
growth in USD revenues to US$1,722mn (V/s US$1,726mn expected and V/s
Promoters
60.4
US$1,691mn in 1QFY2017). In terms of verticals, the CC qoq growth was driven
MF / Banks / Indian Fls
10.1
by Life Sciences & Healthcare at 8.2%, Retail & CPG at 7.7% and Financial
FII / NRIs / OCBs
26.2
Services at 5.6%. USA posted a CC qoq growth of 5.5%, ROW posted a CC qoq
Indian Public / Others
3.3
growth of 2.0%, and Europe posted a CC qoq de-growth of 2.1%. On the
employee front, the attrition in IT services (LTM) was 18.6%, while the blended
utilization rate came in at 85.3% (V/s 85.8% in 1QFY2017). The EBIT margins
Abs.(%)
3m 1yr
3yr
came in at 20.1% (V/s 20.0% expected), a dip of ~46bp qoq. Consequently, the
Sensex
1.4
2.6
36.0
PAT came in at `2,014cr (V/s `1,979cr), a dip of 1.6% qoq.
HCL Tech
11.2
(5.1)
54.5
Outlook and valuation: We expect HCL Tech to post a USD and INR revenue
CAGR of 16.0% and 18.0%, respectively, over FY2016-18E. On back of strong
3-year price chart
order book and given the attractive valuations, we recommend a Buy on the stock.
1,200.0
1,000.0
Key financials (Consolidated, US GAAP)
800.0
Y/E March (` cr)
FY2015
FY2016
FY2017E
FY2018E
600.0
Net sales
37,061
30,781
49,242
57,168
400.0
% chg
12.6
(16.9)
60.0
16.1
200.0
Net profit
7,253
5,643
7,862
9,037
0.0
% chg
17.2
(22.2)
39.3
14.9
EBITDA margin (%)
23.5
21.5
20.5
20.5
EPS (`)
51.4
40.0
55.7
64.1
Source: Company, Angel Research
P/E (x)
16.2
20.8
14.9
13.0
P/BV (x)
4.7
4.2
3.0
2.3
RoE (%)
29.3
20.1
20.3
17.9
RoCE (%)
23.1
15.6
17.2
15.9
Sarabjit kour Nangra
EV/Sales (x)
2.9
3.5
1.9
1.4
+91 22 3935 7800 Ext: 6806
EV/EBITDA (x)
12.2
16.1
9.2
7.0
[email protected]
Source: Company, Angel Research; Note: CMP as of October 24, 2016
Please refer to important disclosures at the end of this report
1
HCL Technologies | 2QFY2017 Result Update
Exhibit 1: 2QFY2017 performance (Consolidated, US GAAP)
Y/E March (` cr)
2QFY17
1QFY17
% chg (qoq)
2QFY16
% chg (yoy)
1HFY17
1HFY16
% chg(yoy)
Net revenue
11,519
11,336
1.6
10,097
14.1
22,855
20,438
11.8
Cost of revenue
7,653
7,440
2.9
6,742
13.5
15,093
13,391
12.7
Gross profit
3,866
3,896
(0.8)
3,355
15.2
7,762
7,047
10.1
SG&A expense
1,355
1,375
(1.5)
1,263
7.3
2,730
2,708
0.8
EBITDA
2,511
2,521
(0.4)
2,092
20.0
5,032
4,339
16.0
Dep. and amortization
193
188
2.7
135
43.0
381
288
32.3
EBIT
2,318
2,333
(0.6)
1,957
18.4
4,651
4,051
14.8
Other income
235
253
(7.1)
241
(2.5)
488
596
PBT
2,553
2,586
(1.3)
2,198
16.2
5,139
4,647
10.6
Income tax
538
543
(0.9)
472
14.0
1,081
1,002
7.9
PAT
2,014
2,047
(1.6)
1,726
16.7
4,058
3,645
11.3
Forex gain/(loss)
-
-
-
-
-
-
-
Adjusted PAT
2,014
2,047
(1.6)
1,726
16.7
4,058
3,645
11.3
EPS
14.3
14.5
(1.6)
12.2
16.7
28.8
25.8
11.3
Gross margin (%)
33.6
34.4
(81)bp
33.2
33bps
34.0
36.8
(279)bp
EBITDA margin (%)
21.8
22.2
(44)bp
20.7
108bps
22.0
24.7
(267)bp
EBIT margin (%)
20.1
20.6
(46)bp
19.4
74bps
20.4
23.3
(293)bp
PAT margin (%)
17.5
18.1
(57)bp
17.1
39bps
17.8
20.5
(270)bp
Source: Company, Angel Research, Note-FY2016 is 12month results for meaningful comparison, From FY2017, company has March ending company
Exhibit 2: 2QFY2017 - Actual Vs Angel estimates
(` cr)
Actual
Estimate
Variation (%)
Net revenue
11,519
11,548
(0.3)
EBIDTA margin (%)
21.8
21.6
1bp
PAT
2,014
1,979
1.8
Source: Company, Angel Research
Sales just in line with expectation
For 2QFY2017, the company posted a 1.9% sequential growth in USD revenues to
US$1,722mn (V/s US$1,726mn expected and V/s US$1,691mn in 1QFY2017). In
INR terms, revenues grew by 1.6% qoq to `11,519cr (V/s `11,548cr expected).
On CC basis, the company posted a revenue growth of 2.8% qoq.
In terms of verticals, the CC qoq growth was driven by Life Sciences & Healthcare
at 8.2%, Retail & CPG at 7.7%, Financial Services at 5.6%, Public Services at -
3.7%, and Telecommunications, Media, Publishing & Entertainment at 6.1%.
USA posted a CC qoq growth of 5.5%, ROW posted a CC qoq growth of 2.0%
and Europe posted a CC qoq de-growth of 2.1%.
The company signed 12 transformational deals this quarter. These deals were led
by the geographies of America and Europe, spanning across service lines and
verticals of manufacturing, life sciences & healthcare, consumer services, financial
services, and energy & utilities.
October 25, 2016
2
HCL Technologies | 2QFY2017 Result Update
Exhibit 3: Revenue growth trend
7
1,700
6.6
1,600
6
1,500
5
1,400
4
1,300
3
2
1,200
1.9
1.4
1.3
1,100
1
0.51,545
1,566
1,587
1,691
1,722
1,000
0
1QFY2016
2QFY2016
3QFY16
1QFY2017
2QFY2017
Revenue (USD)
qoq growth (%)
Source: Company, Angel Research
In terms of services, the Engineering & R&D services (which constituted 17.8% of
sales) posted a growth of 2.3% qoq (CC), while Application services (accounting
for 37.8% of sales) grew by 1.4% qoq (CC). Infrastructure services, another
important segment of the company, which contributes by around 40.3% to overall
sales, posted a growth of 4.4% qoq (CC). Business services, which constituted 4.1%
of sales, grew by 2.1% qoq (CC).
Exhibit 4: Revenue growth trend (Service wise)
% of revenue
% growth CC (qoq)
% growth (yoy)
Application services
37.8
1.4
4.7
Infrastructure services
40.3
4.4
21.4
Business services
4.1
2.1
2.5
Engineering and R&D services
17.8
2.3
5.7
Source: Company, Angel Research
Industry segment wise, the company’s Financial Services vertical (contributed
24.1% to revenue) posted a 5.6% qoq growth in CC terms. The Manufacturing
vertical (contributed 32.2% to revenue) posted a 0.9% qoq de-growth in CC terms.
Public services, Life sciences & Healthcare, and Telecommunication, Media,
Publishing & Entertainment reported a qoq growth of (3.7)%, 8.2%, and 6.1%, all
in CC terms, respectively. Retail & CPG (contributed 10.4% of the revenue), on the
other hand, reported a growth of 7.7% qoq CC terms, during the quarter.
October 25, 2016
3
HCL Technologies | 2QFY2017 Result Update
Exhibit 5: Revenue growth trend (Industry wise)
% of revenue
% growth (CC qoq)
% growth (yoy)
Financial services
24.1
5.6
5.3
Manufacturing
32.2
(0.9)
7.1
Life sciences & Healthcare
12.6
8.2
15.9
Public Services
10.9
(3.7)
25.0
Retail & CPG
10.4
7.7
21.6
Telecom, MPE
9.4
6.1
14.9
Source: Company, Angel Research
Among geographies, in CC terms, America grew by 5.5% qoq, RoW grew by
2.0% qoq, while Europe de-grew by 2.1% qoq, during the period.
Exhibit 6: Revenue growth trend (Geography wise in CC terms)
21
18
15
16.9
12
9
5.6
6
3.7
5.5
2.0
3
5.5
(2.4)
2.0
0
(2.4)
0.7
(3)
-
(2.1)
1.3
(6)
(3.4)
(9)
(8.4)
(12)
1QFY2016
2QFY2016
3QFY16
1QFY2017
2QFY2017
US
Europe
Rest of the world
Source: Company, Angel Research
Hiring and utilization
During the quarter, the overall headcount of HCL Tech increased by 9,083 to
1,09,795 employees. The attrition rate in IT Services inched up to 18.6% (V/s
17.8% in 1QFY2017) and the blended utilization level of the company inched up
to 85.3% (V/s 85.8% in 1QFY2017).
Exhibit 7: Hiring trend
Particulars
1QFY16 2QFY16 3QFY16 1QFY17 2QFY17
Technical
96,541
94,652
95,649
98,225
99,897
Support
9,030
9,044
9,247
9,743
9,898
Total employee base
105,571
103,696
104,896
107,968
109,795
Gross addition
7,889
6,234
9,280
10,515
9,083
Net addition
(1559)
(1875)
1200
3,072
2,097
Attrition - IT services (LTM) - %
16.3
16.7
17.3
17.8
18.6
Source: Company, Angel Research
October 25, 2016
4
HCL Technologies | 2QFY2017 Result Update
Operating margin higher than expectation
On the operating front, the EBDITA margins came in at 21.8% (V/s 22.2% in
1QFY2017), a qoq dip of 44bp; while the EBIT margins came in at 20.1% (V/s
20.0% expected), a qoq dip of ~46bp. Margins beat our estimates on back of
better utilization & lower attrition.
Exhibit 8: Margin profile
40
34.4
34.6
34.9
34.4
33.6
35
30
25
22.2
22.2
21.5
21.8
20.9
20
20.8
20.0
20.6
20.1
19.6
15
10
1QFY16
2QFY16
3QFY16
1QFY17
2QFY17
Gross margin
EBITDA margin
EBIT margin
Source: Company, Angel Research
Client pyramid
The company signed 12 transformational deals this quarter. These deals were led
by the geographies of America and Europe, spanning across service lines and
verticals of manufacturing, life sciences & healthcare, consumer services, financial
services, and energy & utilities.
Exhibit 9: Client pyramid
Particulars
1QFY16
2QFY16
3QFY16
1QFY17
2QFY17
US$1mn-5mn
262
267
262
245
259
US$5mn-10mn
91
87
84
91
89
US$10mn-20mn
58
66
49
66
64
US$20mn-30mn
32
32
35
32
33
US$30mn-40mn
19
16
16
16
15
US$40mn-50mn
6
4
5
12
14
US$50mn-100mn
11
12
10
13
12
US$100mn plus
7
7
7
7
8
Source: Company, Angel Research
October 25, 2016
5
HCL Technologies | 2QFY2017 Result Update
Investment arguments
Robust outlook: The company’s engineering services has been seeing lumpy
growth over the last few quarters. However, on back of the deals on hand, the
company gave a revenue growth guidance of 12-14% in CC for FY2017. The
revenue guidance is based on FY2016 (April to March 2016) average exchange
rates. The above constant currency guidance translates to 11.2-13.2% in US$
terms based on June 30 2016 exchange rates. The operating margin (EBIT) for
FY’2017 is expected to be in the range of 19.5% to 20.5%.
We expect HCL Tech to post a USD and INR revenue CAGR of 16.3% and 18.0%,
respectively, over FY2016-18E (inclusive of the acquisition of Geometric Software
and Volvo deals).
Healthy pipeline: HCL Tech signed 12 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.
Outlook and valuation
On the operating front, HCL Tech’s EBIT margin has been around 20.1% in
FY2016, a dip of 317bp over the previous financial year. With the acquisition of
Geometric Software and Volvo, we expect the EBIT margin to be under pressure.
We expect the EBIT and PAT to post a 10.0% and 7.6% CAGR, respectively, over
FY2016-18E. At the current market price, the stock is trading at 14.9x FY2017E
and 13.0x FY2018E EPS. We recommend a Buy, with a price target of `1,000.
Exhibit 10: One-year forward PE (x) chart
1,200
1,000
800
600
400
200
0
Price
18x
15x
12x
9x
6x
Source: Company, Angel Research
October 25, 2016
6
HCL Technologies | 2QFY2017 Result Update
Exhibit 11: Recommendation summary
Company
Reco
CMP Tgt Price Upside
FY2018E FY2018E
FY2016-18E
FY2018E
FY2018E
(`)
(`)
(%)
EBITDA (%)
P/E (x)
EPS CAGR (%)
EV/Sales (x)
RoE (%)
HCL Tech
Buy
811
1,000
23.4
20.5
12.6
9.6
1.8
17.9
Infosys
Buy
1,029
1,249
21.4
27.0
14.8
8.4
2.5
21.6
TCS
Accumulate
2,428
2,867
7.9
27.6
16.7
8.5
3.3
33.1
Tech Mahindra Buy
428
700
38.6
17.0
10.4
13.2
0.9
20.7
Wipro
Buy
484
590
22.0
18.1
12.1
5.3
1.7
19.3
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.
October 25, 2016
7
HCL Technologies | 2QFY2017 Result Update
Profit and loss statement (Consolidated, US GAAP)
Y/E Mar (` cr)
FY2014
FY2015
FY2016
FY2017E
FY2018E
Net sales
32,908
37,061
30,781
49,242
57,168
Cost of revenues
20,209
23,798
20,235
32,549
37,788
Gross profit
12,699
13,263
10,546
16,693
19,380
% of net sales
38.6
35.8
34.3
33.9
33.9
SG&A expenses
4,070
4,563
3,940
6,598
7,661
% of net sales
12.4
12.3
12.8
13.4
13.4
EBITDA
8,629
8,700
6,606
10,095
11,719
% of net sales
26.2
23.5
21.5
20.5
20.5
Depreciation and amort.
753
451
393
640
740
% of net sales
2.3
1.2
1.3
1.3
1.3
EBIT
7,876
8,249
6,213
9,454
10,979
% of net sales
23.9
22.3
20.2
19.2
19.2
Other income, net
492
912
756
756
756
Profit before tax
8,369
9,161
6,969
10,211
11,736
Provision for tax
1,629
1,908
1,364
2,349
2,699
% of PBT
19.5
20.8
19.6
23.0
23.0
PAT
6,739
7,253
5,605
7,862
9,037
Share from equity invest.
-
-
-
-
-
Forex loss
(549)
-
-
-
-
ESOP charges
25
103
38
38
38
Reported net profit
6,190
7,253
5,643
7,862
9,037
Fully diluted EPS (`)
43.9
51.4
40.0
55.7
64.1
Note: FY2016 Numbers are 9 month figures
October 25, 2016
8
HCL Technologies | 2QFY2017 Result Update
Balance sheet (Consolidated, US GAAP)
Y/E Mar (` cr)
FY2014 FY2015 FY2016 FY2017E FY2018E
Cash and cash equivalent
1,021
1,352
729
6,950
13,473
Account receivables, net
5,684
6,563
7,721
8,504
9,873
Unbilled receivables
2,024
2,923
3,002
2,955
3,430
Deposit with banks
8,370
9,670
10,587
15,587
20,587
Deposit (one year with HDFC ltd)
-
-
-
-
-
Invest. securities, available for sale
609
767
537
2,250
2,250
Other current assets
2,125
2,338
2,410
2,710
3,010
Total current assets
19,833
23,613
24,986
38,956
52,624
Property and equipment, net
3,147
3,820
4,323
4,623
4,923
Intangible assets, net
5,149
5,204
6,419
6,419
6,419
Deposits with HDFC Ltd.
-
-
-
-
-
Fixed deposits with banks
-
-
-
-
-
Investment securities HTM
-
8
160
160
160
Investment in equity investee
16
-
-
-
-
Other assets
2,346
3,066
3,879
4,780
4,780
Total assets
30,490
35,711
39,768
54,939
68,906
Current liabilities
8,197
9,232
9,509
13,199
15,323
Borrowings
751
469
973
973
973
Other liabilities
1,462
1,259
1,264
2,077
2,078
Total liabilities
10,409
10,960
11,745
16,249
18,374
Minority interest
-
-
-
-
Total stockholder equity
20,081
24,751
28,022
38,690
50,532
Total liab. and stock holder equity
30,490
35,711
39,768
54,939
68,906
Note: FY2016 Numbers are 9 month figures
October 25, 2016
9
HCL Technologies | 2QFY2017 Result Update
Cash flow statement (Consolidated, US GAAP)
Y/E Mar (` cr)
FY2014
FY2015
FY2016
FY2017E
FY2018E
Pre tax profit from operations
7,797
7,253
5,643
7,862
9,037
Depreciation
733
451
393
640
740
Expenses (deffered)/written off/others
(584)
(168)
(48)
(48)
(48)
Pre tax cash from operations
7,946
7,536
5,988
8,455
9,729
Other income/prior period ad
572
912
756
756
756
Net cash from operations
8,518
8,448
6,744
9,211
10,485
Tax
(1,547)
(1,908)
(1,364)
(2,349)
(2,699)
Cash profits
6,971
6,540
5,381
6,863
7,786
(Inc)/dec in current assets
(1,749)
(1,991)
(1,309)
(1,036)
(2,144)
Inc/(dec) in current liabilties
1,654
1,035
277
3,690
2,124
Net trade working capital
(95)
(956)
(1,033)
2,654
(20)
Cashflow from operating activities
6,875
5,584
4,348
9,517
7,766
(Inc)/dec in fixed assets
(1,094)
(674)
(503)
(300)
(300)
(Inc)/dec in intangibles
(248)
(55)
(1,215)
-
-
(Inc)/dec in investments
(4,688)
(1,458)
(687)
(6,714)
(5,000)
(Inc)/dec in minority interest
-
-
-
-
-
Inc/(dec) in non current liabilities
(54)
(203)
5
814
-
(Inc)/dec in non current assets
(107)
(214)
(72)
(300)
(300)
Cashflow from investing activities
(6,191)
(2,602)
(2,473)
(6,500)
(5,600)
Inc/(dec) in debt
55
-
-
-
-
Inc/(dec) in equity/premium
-
-
-
-
-
ESOP charges
(25)
(103)
(103)
(103)
(103)
Dividends
(296)
(1,651)
(2,805)
(2,805)
(2,805)
Others
(129)
(208)
2,385
621
7,692
Cashflow from financing activities
(396)
(1,962)
(523)
(2,287)
4,784
Cash generated/(utilised)
289
331
(623)
6,221
6,523
Cash at start of the year
732
1,021
1,352
729
6,950
Cash at end of the year
1,021
1,352
729
6,950
13,473
Note: FY2016 Numbers are 9 month figures
October 25, 2016
10
HCL Technologies | 2QFY2017 Result Update
Key ratios
Y/E Mar
FY2014
FY2015
FY2016
FY2017E
FY2018E
Valuation ratio (x)
P/E (on FDEPS)
18.9
16.2
20.8
14.9
13.0
P/CEPS
16.9
15.2
19.4
13.8
12.0
P/BVPS
5.8
4.7
4.2
3.0
2.3
Dividend yield (%)
1.7
1.7
2.0
2.0
2.0
EV/Sales
3.3
2.9
3.5
1.9
1.4
EV/EBITDA
12.5
12.2
16.1
9.2
7.0
EV/Total assets
3.5
3.0
2.7
1.7
1.2
Per share data (`)
EPS (Fully diluted)
43.9
51.4
40.0
55.7
64.1
Cash EPS
49.2
54.6
42.8
60.3
69.3
Dividend
14.0
14.0
17.0
17.0
17.0
Book value
142
175
199
274
358
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)
1.1
1.0
0.8
0.9
0.8
Leverage ratio (Assets/Equity)
1.5
1.4
1.4
1.4
1.4
Operating ROE
33.6
29.3
20.0
20.3
17.9
Return ratios (%)
RoCE (pre-tax)
25.8
23.1
15.6
17.2
15.9
Angel RoIC
38.4
34.5
22.4
31.5
33.8
RoE
30.8
29.3
20.1
20.3
17.9
Turnover ratios (x)
Asset turnover (fixed assets)
11.2
10.6
7.6
11.0
12.0
Receivables days
71
68
83
78
68
Note: FY2016 Numbers are 9 month figures
October 25, 2016
11
HCL Technologies | 2QFY2017 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)
October 25, 2016
12