HCL Technologies. Rating: Target price: EPS: Target CMP. Rating. Rs. 826 REDUCE. Rs.760

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1 : price: EPS: How does our one year outlook change? HCLT registered a strong quarter with revenues growing at 6.5% qoq (4% qoq organic) including $40m contribution from Volvo, after a disappointing show of numbers in the last few quarters. HCLT providing guidance for the first time (12-14% yoy CC revenue growth and % EBIT margins for FY17E), especially in a bleak market scenario, is a good sign and provides visibility of the company. However, the growth guidance includes c$300m from Volvo (acquisition plus service) and c$30-40m from IP deal of inorganic revenues which is c45% of incremental revenues in FY17E. However, we belive the street will ignore the organic-inorganic component of growth and would be more focussed on total growth and quarterly beat, while the fact still remains that HCLT struggles to meet the industry growth organically. We retain rating with TP of (ascribing 13x tomar-18 EPS). The IMS segment which grew c10% organically during Q1, is the growth driver for HCLT and continue to be the key growth driver. While the market for IMS is still very large the margins and pricing will come under preesure due to automation and shift towards IAAS. Though the guidance on operating margins looks achievable and build in adequate impact from lower organic growth and lack of substantial levers. It also factors any incremental headwind to margins from the Geometric acquisition which has EBIT margins of 12% and might impact total margins moderately. How does our 3 year Outlook change? HCLT s total revenue growth in FY16 was around 6%, lowest in a decade. The IMS segment, a key driver of growth for HCLT and which had grown at a CAGR of 40% over FY09-14, grew only 13.5% in FY15 and 10.5% in FY16. This could moderate over next three years as its business model gets disrupted by automation and clients opts for infrastructure as a service model. Additionally, the revenues of the EAS segment have remained flat since FY13 due to structural changes in the ERP industry, while the ADM segment is under pricing pressure and is expected to grow by max 5% over the next three years. To counter these changes, HCLT is investing in digital and IoT which will keep margins depressed in FY17/18. 1QFY17 Update Promoters 60.4 Institutions 32.6 Public 7.0 % 1m 3m 12m HCLT Sensex CNXIT Key estimate revision FY17E FY18E Old New Change Old New Change US$ Revenues 7,042 6,999-1% 7,700 7,716 0% USD/INR rate % % INR Revenues 4,57,744 4,58,378 0% 5,00,471 5,01,531 0% EBITDA 95,771 1,00,617 5% 99,954 1,08,107 8% Margin % 20.9% 22.0% +105bps 20.0% 21.6% +156bps EPS % % All figures in Rs. mn, except EPS, which is in Rs. Financial summary Year Revenues (Rs. mn) Bloomberg Shares o/s Market Cap 04 Aug 2016 HCLT IN 1,411mn Rs. 1,165bn 52-wk High-Low Rs m Avg. Daily Vol Index Rs. 2,093mn NIFTY EBITDA EPS (Rs.) P/E (x) EV/EBITDA(x) ROE (%) Margin (%) FY14 3,29,180 26% % FY15 3,70,620 23% % FY16* 3,11,360 22% % FY17E 4,58,378 22% % FY18E 5,01,531 22% % * FY16 is 9 month fiscal year SOUMITRA CHATTERJEE soumitra@sparkcapital.in OMPRAKASH KAVADI omprakashkavadi@sparkcapital.in Find Spark Research on Bloomberg (SPAK <go>), Thomson First Call, Reuters Knowledge and Factset Page 1

2 Quarterly financial statements Quarterly financial results Rs. mn\period Jun-16 Mar-16 qoq growth Jun-15 yoy growth FY16* FY17E yoy Growth Revenues 1,13,360 1,06,980 6% 97,770 16% 3,11,360 4,58,378 47% Direct Costs 74,400 69,610 7% 64,290 16% 2,03,520 3,02,713 49% Gross Profits 38,960 37,370 4% 33,480 16% 1,07,840 1,55,665 44% SG & A 13,750 13,580 1% 12,480 10% 39,690 55,049 39% EBITDA 25,210 23,790 6% 21,000 20% 68,150 1,00,617 48% Depreciation 1,690 1,392 21% 1,120 51% 3,952 8, % Amortisation % % % EBIT 23,330 22,218 5% 19,760 18% 63,698 91,360 43% Foreign Exchange Gains / (loss) % % NM Other Income, net 1,870 1,970-5% 1,760 6% 7,600 8,211 8% PBT 25,860 24,218 7% 21,890 18% 71,658 1,00,231 40% Provision for Tax 5,430 4,970 9% 4,060 34% 14,990 22,535 50% Share of Minority Interest 0 0 NM 0 NM 0 0 NM Net Income 20,430 19,248 6% 17,830 15% 55,698 77,696 39% EPS - Basic % % % EPS - Diluted % % % EBITDA margin 22.2% 22.2% +0bps 21.5% +76bps 21.9% 22.0% -11bps EBIT Margin 20.6% 20.8% -19bps 20.2% +37bps 20.5% 19.9% -67bps Tax rate 21.0% 20.5% +47bps 18.5% +245bps 20.9% 22.5% +157bps PAT margin 18.0% 18.0% +3bps 18.2% -20bps 17.9% 17.0% -108bps *t comparable as FY16 is a 9 month fiscal year Page 2

3 Financial Summary Abridged Financial Statements Key metrics Rs. mn FY15 FY16* FY17E FY18E FY15 FY16* FY17E FY18E Profit & Loss Cashflow Revenues 3,70,620 3,11,360 4,58,378 5,01,531 Net cash from operations 58,195 43,194 58,560 78,302 Direct Costs 2,37,970 2,03,520 3,02,713 3,37,879 Net cash from investing 3,145 2,297-34,758-2,624 Gross Profits 1,32,650 1,07,840 1,55,665 1,63,652 Net cash from financing -30,198-28,826-20,507-22,338 SG & A 45,630 39,690 55,049 55,546 Free cash flow 80,645 63,207 67,278 94,107 EBITDA 87,020 68,150 1,00,617 1,08,107 Cash at year-end 41,348 30,185 33,481 86,820 Depreciation 4,030 3,952 8,591 9,747 Grow th Amortisation Revenues 13% -16% 47% 9% EBIT 82,510 63,698 91,360 97,731 EBITDA 0% -22% 48% 7% Foreign Exchange Gains / (loss) (190) PAT 14% -23% 39% 7% Other Income, net 9,330 7,600 8,211 11,376 EPS 14% -23% 38% 7% PBT 91,650 71,658 1,00,231 1,09,106 Margins Provision for Tax 19,080 14,990 22,535 25,639 EBITDA 23.5% 21.9% 22.0% 21.6% Share of Minority Interest PAT 19.6% 17.9% 17.0% 16.6% Net Income 72,570 55,698 77,696 83,468 Return EPS- Basic ROE 32% 21% 25% 23% EPS - Diluted ROCE 25% 17% 21% 19% Balance sheet Valuation Total Current Liabilities 92,320 95,085 1,11,378 1,23,573 Fully diluted shares (mn) 1,408 1,407 1,422 1,426 Borrow ings 4,690 9,732 7,918 7,918 Market cap (Rs. mn) 11,57,499 11,57,499 11,57,499 11,57,499 Other Liabilities 12,590 12,635 18,107 18,107 EV (Rs.mn) 10,65,010 10,44,299 10,48,702 10,15,494 Total Liabilities 1,09,600 1,17,452 1,37,403 1,49,598 EV/Sales (x) Total Stockholders Equity 2,47,510 2,80,221 3,37,364 3,98,493 EV/EBITDA (x) Total - Sources of funds 3,57,110 3,97,673 4,74,767 5,48,091 P/E (x) Cash & Cash Equivalents 13,520 7,293 36,115 89,236 EPS(E) / Current market price 6% 5% 7% 7% Account Receivables, net 65,630 77,213 85,052 94,365 Revenue per employee (000's) 3,747 2,951 4,107 4,079 Fixed Deposits w ith Banks 96,700 1,05,871 1,06,224 1,06,224 EBITDA per employee (000's) Total - Application of funds 3,57,110 3,97,673 4,74,767 5,48,091 PAT per employee (000's) *FY16 corresponds to 9 month fiscal year (July 2015-Mar 2016) Page 3

4 HCL Tech Crystal Ball Gazing FY11-16 CAGR % Revenue EBITDA PAT Price Moderating revenue growth of 10% Growth largely driven by (Rs bn) FY11 FY15 FY16* FY17E FY18E FY19E FY20E Revenue HCLT s revenues and earnings to grow by 10% and 9% CAGR over FY16-20E due to revenue growth trajectory moderating due to portfolio issues and also clients moving infrastructure to As A Service model. EBITDA margins to decline from 22% in FY16 to 21% in FY20 due to lower growth. Moderate margin dip due low lower growth Low revenue growth and moderating margins will result in acquisitions in FY17. Organic growth of 6% CAGR FY16-20E Impacted further by integration of low margin acquisitions and lower pricing in IMS and ADM deals Low multiple Ebitda Margins 17.1% 23.5% 21.9% 22.0% 21.6% 21.1% 20.7% PAT FY11 FY15 FY16* FY17E FY18E FY19E FY20E RoE 22% 32% 21% 25% 23% 21% 20% Leverage Debtor days CFO (Rs bn) P/E multiple FY20E EPS Price target 13x x Trading History % of times stock traded PE range <12x 12x-13x 13x-14x 14x-15x >15x Entry = Rs. 14x FY18E Cumulative Dividends of Rs. 60 Exit multiple of 13x FY20E EPS TOTAL RETURN OF 1.2x *FY16 is a 9 month fiscal year Page 4

5 Spark Disclaimer Rs. HCL Tech 3 Year Price and History 1,200 1, Aug-13 Feb-14 Aug-14 Jan-15 Jul-15 Jan-16 Jul-16 Price Report Date Price Reco. 02/May/ Reduce 05/Apr/ Reduce 20/Jan/ Reduce 20/Oct/ Reduce 04/Aug/ Reduce 11/Jun/ Reduce 22/Apr/ Reduce 23/Mar/ Sell 02/Feb/ Reduce 17/Dec/ Reduce 24/v/ Reduce 20/Oct/ Reduce 07/Oct/ Reduce Report Date Price Reco. 19/Aug/ Reduce 04/Aug/ Reduce 01/Jul/ Reduce 21/Apr/ Reduce 07/Apr/ Sell 20/Jan/ Sell 02/Dec/ Sell 28/Oct/ Add 07/Oct/ Add 01/Aug/ Add Spark Capital Advisors (India) Private Limited (Spark Capital) and its affiliates are engaged in investment banking, investment advisory and institutional equities and infrastructure advisory services. Spark Capital is registered with SEBI as a Stock Broker and Category 1 Merchant Banker. We hereby declare that our activities were neither suspended nor we have defaulted with any stock exchange authority with whom we are registered in the last five years. We have not been debarred from doing business by any Stock Exchange/SEBI or any other authorities, nor has our certificate of registration been cancelled by SEBI at any point of time. Absolute Interpretation BUY Stock expected to provide positive returns of >15% over a 1-year horizon ADD Stock expected to provide positive returns of >5% <15% over a 1-year horizon Stock expected to provide returns of <5% -10% over a 1-year horizon SELL Stock expected to fall >10% over a 1-year horizon Spark Capital has a subsidiary Spark Investment Advisors (India) Private Limited which is engaged in the services of providing investment advisory services and is registered with SEBI as Investment Advisor. Spark Capital has also an associate company Spark Infra Advisors (India) Private Limited which is engaged in providing infrastructure advisory services. This document does not constitute or form part of any offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. This document is provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. thing in this document should be construed as investment or financial advice, and nothing in this document should be construed as an advice to buy or sell or solicitation to buy or sell the securities of companies referred to in this document. Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult its own advisors to determine the merits and risks of such an investment. This document is being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, copied, in whole or in part, for any purpose. This report is not directed or intended for distribution to or use by any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject Spark Capital and/or its affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to a certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such applicable restrictions. This material should not be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. Spark Capital makes no representation or warranty, express or implied, as to the accuracy, completeness or fairness of the information and opinions contained in this document. Spark Capital, its affiliates, and the employees of Spark Capital and its affiliates may, from time to time, effect or have effected an own account transaction in, or deal as principal or agent in or for the securities mentioned in this document. They may perform or seek to perform investment banking or other services for, or solicit investment banking or other business from, any company referred to in this report. Page 5

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