1QFY2017 Result Update | IT
August 8, 2016
HCL Technologies
BUY
CMP
`822
Performance Highlights
Target Price
`1,000
(` cr) - Consl.
1QFY17 3QFY16
% chg (qoq) 1QFY16
% chg (yoy)
Investment Period
12 Months
Net revenue
11,336
10,698
6.0
9,267
22.3
EBIT
2,333
2,222
5.0
1,978
17.9
Stock Info
Adj. EBITDA margin (%)
20.6
20.6
(19)bp
21.3
(76)bp
Sector
IT
PAT
2,047
1,925
6.3
1,683
21.6
Market Cap (` cr)
115,908
Source: Company, Angel Research
Net Debt (` cr)
(101,878)
For 1QFY2017, HCL Technologies (HCL Tech) posted better-than-expected
Beta
0.6
numbers on all fronts. In US$ terms, revenue came in at US$1,691mn V/s
52 Week High / Low
997/707
US$1,674mn expected and V/s US$1,587mn in 3QFY2016, ie a growth of 6.5%
Avg. Daily Volume
202,406
qoq (6.0% qoq in constant currency [CC] terms). On the operating front, the EBIT
Face Value (`)
2
margin came in at 20.6% V/s 19.4% expected and V/s 20.8% in 3QFY2016, ie a
BSE Sensex
28,078
qoq dip of 19bp. Thus, the adj. net profit came in at `2,047cr V/s `1,925cr in
Nifty
8,683
3QFY2016, a qoq growth of 6.3%. For FY2017, the company gave a revenue
Reuters Code
HCLT.BO
growth guidance of 12.0-14.0% in CC terms which translates into an 11.2% to
Bloomberg Code
[email protected]
13.2% growth in US$ 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 1QFY2017, the company posted better-than-expected
Shareholding Pattern (%)
numbers on all fronts. In US$ terms, revenue came in at US$1,691mn V/s
Promoters
60.4
US$1,674mn expected and V/s US$1,587mn in 3QFY2016, ie a growth of 6.5%
MF / Banks / Indian Fls
10.0
qoq (6.0% qoq in CC terms). The growth was driven by Europe which posted a
FII / NRIs / OCBs
26.2
16.9% CC qoq growth; USA posted a 2.0% qoq growth and ROW posted a flat
Indian Public / Others
3.4
growth. In terms of industries, Manufacturing grew 12.0% qoq CC, Public Services
posted an 11.8% qoq CC growth and Retail & CPG posted a 14.5% qoq CC
growth. On the operating front, the EBIT margin came in at 20.6% V/s 19.4%
Abs.(%)
3m 1yr
3yr
expected and V/s 20.8% in 3QFY2016, ie a qoq dip of 19bp. Thus, the adj. net
Sensex
11.3
(0.4)
46.5
profit came in at `2,047cr V/s `1,925cr in 3QFY2016, a qoq growth of 6.3%
HCL Tech
41.9
52.0
559.1
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 order
3-year price chart
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)
16.0
20.5
14.7
12.8
P/BV (x)
4.7
4.1
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)
2.8
3.4
1.9
1.4
+91 22 3935 7800 Ext: 6806
EV/EBITDA (x)
12.0
15.8
9.1
6.8
[email protected]
Source: Company, Angel Research; Note: CMP as of August 5, 2016
Please refer to important disclosures at the end of this report
1
HCL Technologies | 1QFY2017 Result Update
Exhibit 1: 1QFY2017 performance (Consolidated, US GAAP)
Y/E March (` cr)
1QFY17
3QFY16
% chg (qoq)
1QFY16
% chg (yoy)
FY16
FY15
% chg(yoy)
Net revenue
11,336
10,698
6.0
9,267
22.3
40,913
35,708
14.6
Cost of revenue
7,440
6,961
6.9
5,997
24.1
26,901
22,583
19.1
Gross profit
3,896
3,737
4.3
3,270
19.1
14,012
13,125
6.8
SG&A expense
1,375
1,358
1.3
1,179
16.6
5,217
4,308
21.1
EBITDA
2,521
2,378
6.0
2,091
20.6
8,795
8,817
(0.2)
Dep. and amortization
188
157
19.7
113
66.4
569
504
12.9
EBIT
2,333
2,222
5.0
1,978
17.9
8,226
8,313
(1.0)
Other income
253
200
26.5
179
41.3
1,009
856
PBT
2,586
2,422
6.8
2,157
19.9
9,235
9,169
0.7
Income tax
543
497
9.3
473
14.8
1,883
1,864
1.0
PAT
2,047
1,925
6.3
1,683
21.6
7,352
7,305
0.6
Forex gain/(loss)
-
-
-
-
-
-
-
Adjusted PAT
2,047
1,925
6.3
1,683
21.6
7,352
7,305
0.6
EPS
14.5
13.6
6.3
11.9
21.6
52.3
52.0
0.6
Gross margin (%)
34.4
34.9
(56)bp
35.3
(92)bp
34.2
36.8
(251)bp
EBITDA margin (%)
22.2
22.2
1bp
22.6
(33)bp
21.5
24.7
(320)bp
EBIT margin (%)
20.6
20.8
(19)bp
21.3
(76)bp
20.1
23.3
(317)bp
PAT margin (%)
18.1
18.0
6bp
18.2
(10)bp
18.0
20.5
(249)bp
Source: Company, Angel Research, Note-FY2016 is 12month results for meaningful comparison, From FY2017, company has March ending company
Exhibit 2: 1QFY2017 - Actual Vs Angel estimates
(` cr)
Actual
Estimate
Variation (%)
Net revenue
11,336
11,219
1.0
EBIT margin (%)
20.6
19.4
120bp
PAT
2,047
1,891
8.2
Source: Company, Angel Research
Sales higher than expected
For 1QFY2017, the company posted better than expected numbers on all fronts. It
posted sales of
`11,336cr V/s
`11,219cr expected and V/s
`10,698cr in
3QFY2016 (the company has migrated to financial year reporting, ie to March-
end), ie a qoq growth of 6.0%. In US$ terms, sales came in at US$1,691mn V/s
US$1,674mn expected and V/s US$1,587mn in 3QFY2016, a qoq growth of
6.5% (6.0% qoq in CC terms).
The growth was driven by Europe which posted a 16.9% CC qoq growth; USA
posted a 2.0% qoq growth and RoW posted a flat growth. In terms of industries,
Manufacturing grew 12.0% qoq CC, Public Services posted a 11.8% qoq CC
growth and Retail & CPG posted a 14.5% qoq CC growth.
The company signed 13 transformational deals during the 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.
August 8, 2016
2
HCL Technologies | 1QFY2017 Result Update
Exhibit 3: Revenue growth trend
1,700
7
6.6
1,600
6
1,500
5
1,400
4
1,300
3.1
3
1,200
2
1.4
1.3
1,100
1
1,538
1,545
0.5
1,566
1,587
1,691
1,000
0
4QFY15
1QFY2016
2QFY2016
3QFY16
1QFY2017
Revenue (USD)
qoq growth (%)
Source: Company, Angel Research
In terms of services, the Engineering & R&D services (which constituted 17.7% of
sales) posted a growth 0.7% qoq (CC), while Application services (accounting for
38.3% of sales) grew by 1.9% qoq CC. Infrastructure services, another important
segment of the company, which contributes by around 39.8% to overall sales,
posted a growth of 16.5% qoq. Business services, which constituted 4.1% of sales,
de-grew by 15.9% qoq CC.
Exhibit 4: Revenue growth trend (Service wise)
% of revenue
% growth CC (qoq)
% growth (yoy)
Application services
38.3
1.9
4.3
Infrastructure services
39.8
16.5
25.8
Business services
4.1
(15.9)
(11.5)
Engineering and R&D services
17.7
0.7
4.8
Source: Company, Angel Research
Industry segment wise, the company’s Financial Services vertical (contributed
23.0% to revenue) posted a 0.1% qoq de-growth in CC terms. The Manufacturing
vertical (contributed 33.2% to revenue) posted a 12.0% qoq growth in CC terms.
Public services; Life sciences & Healthcare; and Telecommunication, Media,
Publishing & Entertainment reported a QoQ growth of 11.8%, (1.0)%, and (2.8)%,
all in CC terms, respectively. Retail & CPG (contributed 10.0% of the revenue) on
the other hand reported a growth of 14.5% qoq CC terms, during the quarter.
August 8, 2016
3
HCL Technologies | 1QFY2017 Result Update
Exhibit 5: Revenue growth trend (Industry wise)
% of revenue
% growth (CC qoq)
% growth (yoy)
Financial services
23.6
(0.1)
5.7
Manufacturing
33.2
12.0
7.7
Life sciences & Healthcare
11.9
(1.0)
21.5
Public Services
11.7
11.8
24.7
Retail & CPG
10.0
14.5
14.9
Telecom, MPE
9.1
(2.8)
17.8
Source: Company, Angel Research
Among geographies, in CC terms, Americas grew by 2.0%, Europe grew by
16.9%, while RoW was flat on a sequential basis.
Exhibit 6: Revenue growth trend (Geography wise in CC terms)
21
16.9
18
15
12
9
5.6
5.5
5.1
6
3.7
3
0.1
1.3
2.0
0
0.7
(0.0)
(2.4)
-
(3)
(2.4)
(6)
(3.4)
(9)
(8.4)
(12)
4QFY15
1QFY2016
2QFY2016
3QFY16
1QFY2017
US
Europe
Rest of the world
Source: Company, Angel Research
Hiring and utilization
During the quarter, the overall headcount of HCL Tech increased by10,515 to
1,07,968 employees. The attrition rate in IT Services inched up to 17.8% V/s
17.3% in 3QFY2016. The blended utilization level of the company inched up to
85.8% V/s 85.6% in 3QFY2016.
Exhibit 7: Hiring trend
Particulars
4QFY15 1QFY16 2QFY16 3QFY16 1QFY17
Technical
97,135
96,541
94,652
95,649
98,225
Support
8,972
9,030
9,044
9,247
9,743
Total employee base
1,06,107
105,571
103,696
104,896
107,968
Gross addition
9,448
7,889
6,234
9,280
10,515
Net addition
1,923
(1559)
(1875)
1200
3,072
Attrition - IT services (LTM) - %
16.5
16.3
16.7
17.3
17.8
Source: Company, Angel Research
August 8, 2016
4
HCL Technologies | 1QFY2017 Result Update
Operating margin higher than expectation
On the operating front, the EBIT margin came in at 20.6% V/s 19.4% expected
and V/s 20.8% in 3QFY2016, qoq dip of 19bp. Margins beat our estimates on
back of higher than expected volume growth.
Exhibit 8: Margin profile
40
34.2
34.4
34.6
34.9
34.4
35
30
25
22.2
22.2
21.5
20.9
21.5
20
20.0
20.8
20.6
20.2
19.6
15
10
4QFY15
1QFY16
2QFY16
3QFY16
1QFY17
Gross margin
EBITDA margin
EBIT margin
Source: Company, Angel Research
Client pyramid
HCL Tech signed 13 transformational deals during the 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.
Exhibit 9: Client pyramid
Particulars
4QFY15
1QFY16
2QFY16
3QFY16
1QFY17
US$1mn-5mn
265
262
267
262
245
US$5mn-10mn
87
91
87
84
91
US$10mn-20mn
51
58
66
49
66
US$20mn-30mn
33
32
32
35
32
US$30mn-40mn
17
19
16
16
16
US$40mn-50mn
6
6
4
5
12
US$50mn-100mn
10
11
12
10
13
US$100mn plus
7
7
7
7
7
Source: Company, Angel Research
August 8, 2016
5
HCL Technologies | 1QFY2017 Result Update
Investment arguments
Robust outlook: The company’s engineering services has been seeing lumpy
growth over the last few quarters. However, on back of the deals on hand, the
company gave a revenue growth guidance of 12-14% in CC for FY2017. The
revenue guidance is based on FY2016 (April to March 2016) average exchange
rates. The above constant currency guidance translates to 11.2-13.2% in US$
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 13 transformational deals during the 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 14.7x FY2017E
and 12.8x 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
August 8, 2016
6
HCL Technologies | 1QFY2017 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
822
1,000
21.7
20.5
12.8
9.6
1.4
17.9
Infosys
Accumulate
1,067
1,370
28.4
27.5
14.8
10.4
2.6
22.3
TCS
Buy
2,649
3,004
13.4
27.3
17.6
13.0
3.6
35.5
Tech Mahindra Accumulate
495
700
41.4
17.0
12.0
13.2
1.1
20.7
Wipro
Buy
545
680
24.8
17.9
14.8
9.9
2.1
19.6
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
and 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.
August 8, 2016
7
HCL Technologies | 1QFY2017 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
August 8, 2016
8
HCL Technologies | 1QFY2017 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
39,767
54,939
68,906
Note: FY2016 Numbers are 9 month figures
August 8, 2016
9
HCL Technologies | 1QFY2017 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
August 8, 2016
10
HCL Technologies | 1QFY2017 Result Update
Key ratios
Y/E Mar
FY2014
FY2015
FY2016
FY2017E
FY2018E
Valuation ratio (x)
P/E (on FDEPS)
18.7
16.0
20.5
14.7
12.8
P/CEPS
16.7
15.1
19.2
13.6
11.9
P/BVPS
5.8
4.7
4.1
3.0
2.3
Dividend yield (%)
1.7
1.7
2.1
2.1
2.1
EV/Sales
3.2
2.8
3.4
1.9
1.4
EV/EBITDA
12.3
12.0
15.8
9.1
6.8
EV/Total assets
3.5
2.9
2.6
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
August 8, 2016
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HCL Technologies | 1QFY2017 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)
August 8, 2016
12