RESULT UPDATE 12 th May 2017
May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 India Equity Institutional Research II Result Update - Q4FY17 II 12 th May, 2017 CMP INR 839 Target INR 1068 Potential Upside 27% Market Cap (INR Mn) 1201915 Expect strong revenue growth with profitability Recommendation Buy Sector IT 2 Result highlights HCL Tech s Q4FY17 result was largely in line with our estimates on the revenue front, however, profitability was above our estimates. By Geography: ROW and Americas outperformed, as far as Geographies are concerned, with a 15.8% and 5.3% qoq growth, respectively. By Industry: Public Services and Manufacturing led the growth with a 8.1% and 6.3% qoq growth respectively. By Services: Engineering Services led the pack with a 14.6% qoq growth (mainly due to Geometric acquisition), followed by Application services at 1.8% qoq The company has cut its FY18e revenue guidance by 50 bps on both ends at 10.5% - 12.5% growth, however we believe that it is not a cause of concern. More importantly, company has maintained its EBIT guidance in FY18e at 19.5%-20.5%, which is a huge positive. MARKET DATA Shares Outs (Mn) 1427 Equity Cap (INR Mn) 2854 Mkt Cap (INR Mn) 1201915 52 Wk H/L (INR) 889/706 Volume Avg (3m K) 1485.4 Face Value (INR) 2 Bloomberg Code HCLT IN SHARE PRICE PERFORMANCE 125 115 KEY FINANCIALS Particulars (INR Mn) FY15 FY16 FY17 FY18E FY19E Net Sales 3,57,090 4,09,130 4,67,220 5,24,741 5,88,702 EBITDA 88,190 89,150 1,03,130 1,21,083 1,35,638 PAT 73,101 74,500 84,610 95,059 1,07,864 EPS 51.7 52.8 59.8 67.2 76.3 OPM 24.7% 21.8% 22.1% 23.1% 23.0% NPM 20.5% 18.2% 18.1% 18.1% 18.3% Expect Mode II and Mode III services to be major growth drivers Mode II and III services focus on new growth areas like Digital, Cloud, Security, IoT and Product & Platforms. Revenue from Mode II and Mode III services now account for 18.6% of overall services vs 15.9% in FY16 and grew at 31%. Expect HCL Tech s focus on next-gen services to drive revenue growth above industry estimates at 12.3% CAGR between FY17-FY19E. Furthermore, we expect automation initiatives to be a major trigger for profitability growth. We believe that sector wide automation initiatives will lead to major layoffs and reduction in hiring and headcount eventually. 105 95 Highlights of the quarter (i) Downgraded FY18e revenue guidance by 50 bps to 10.5 12.5% from 11 13% (ii) Company maintained EBIT guidance at 19.5 20.5% (iii) Completed full consolidation of Geometric in the previous quarter (iv) HCL Tech won 8 transformational deals in Q4 (v) Plans to increase investment in Mode II and III services over FY18-19e (vi) Company has 12,000 employees in the US, 55% of which are locals Sensex HCL Tech. MARKET INFO SENSEX 30248 NIFTY 9407 Key Concall Highlights: (i) Mode II and Mode III services would account for 35% of overall revenues by year 2020-2021. (ii) The company is expecting the growth for financial service to continue further due to vendors consolidation and new deals coming onboard. (iii) The clients budget for financial service is flattening due to cannibalization, as spending for Mode I service is declining with an increase in Mode II service (iv) The acquisition for Butler America Aerospace and Geometric would drive growth for engineering service due to increase in adoption for new technology and IoT. Valuation and view HCL Tech reported a solid set of numbers in Q4 and we are particularly impressed with it s ability to deliver growth and profitability as per guidance. We are also optimistic about penetration of Mode 2 and Mode 3 services and expect its contribution to total revenue to increase drastically going ahead. We have an BUY rating on the stock as we assign a multiple of ~14x to its FY19E EPS to arrive at a price target of INR 1,068. SHARE HOLDING PATTERN (%) Particulars Mar 17 Dec 16 Sep 16 Promoters 59.69 60.34 60.36 FIIs 24.56 24.27 25.72 DIIs 7.74 8 6.71 Others 8.01 7.39 7.21 Total 100 100 100 12.3% 14.7% EBITDA CAGR between FY 17 Revenue CAGR between FY 17 and FY 19E and FY 19E
Q4FY17 Result Snapshot 3 Exhibit 1 Quarterly Income Statement INR Mn Q4 FY17 Q3 FY17 Q-o-Q change % The Tax rate for the quarter stood 11.5% in Q4FY17 DSO stood at 63 days in Q4 FY17 Client additions stood at 71 in Q4 FY17 with major additions in the $50 Mn and $100 Mn category Attrition stood at 16.9%, 100 bps improvement over previous quarter. Utilization was recorded at 85.7% and displayed consistency above the 80% mark. Q4 FY16 Y-o-Y change % Q4 FY17 estimates Deviation % Revenues ($) 1,817 1,745 4.1% 1,587 14.5% 1,824 (0.4%) Revenues (INR) 1,20,530 1,18,140 2.0% 1,06,980 12.7% 1,22,088 (1.3%) Direct Cost 79,870 78,090 2.3% 69,610 14.7% 81,030 (1.4%) Gross Profit 40,660 40,050 1.5% 37,370 8.8% 41,057 (1.0%) SG&A 14,170 13,770 2.9% 13,580 4.3% 14,528 (2.5%) EBITDA 26,490 26,280 0.8% 23,790 11.3% 26,529 (0.1%) Depreciation & Amortisation 2,330 2,200 5.9% 1,570 48.4% 2,274 2.5% EBIT 24,160 24,080 0.3% 22,220 8.7% 24,255 (0.4%) Foreign Exchange Gains/(Loss) 480 430 11.6% 30 1500.0% Other Income, net 1,670 1,880 (11.2%) 1,970 (15.2%) 2,387 PreTax Income 26,310 26,390 (0.3%) 24,220 8.6% 26,643 (1.2%) Adjusted Pretax Income 26,310 26,390 (0.3%) 24,220 8.6% 25,150 Tax 3,030 5,680 (46.7%) 4,970 (39.0%) 5,728 Share of Minority Interest 0 0 0 0 Net Profit 23,280 20,710 12.4% 19,250 20.9% 20,914 11.3% Adjusted Net Profit 23,280 20,710 12.4% 19,250 20.9% 19,422 19.9% Diluted EPS (Rs) 16.5 14.7 12.2% 13.6 20.8% 14.8 Adjusted Diluted EPS 16.5 14.7 12.2% 13.6 20.8% 14.8 11.1% No.of Shares (mn) - Diluted 1,414 1,412 1,413 1,411 Margin Analysis % Change Change Gross Profit Margin (%) 33.7% 33.9% (17) 34.9% (120) 33.6% 10 Operating Profit Margin (%) 20.0% 20.4% (34) 20.8% (73) 19.9% 18 EBITDA Margin (%) 22.0% 22.2% (27) 22.2% (26) 21.7% 25 Net Profit Margin (%) 19.3% 17.5% 178 18.0% 132 17.1% 218 Adjusted NPM (%) 19.3% 17.5% 178 18.0% 132 15.9% 341 Deviation Effective Tax rate (%) 11.5% 21.5% (1001) 20.5% (900) 21.5% (998) Cost Analysis % Change Change Direct cost as % of Sales 66.3% 66.1% 17 65.1% 120 66.4% (10) SG&A as % of Sales 11.8% 11.7% 10 12.7% (94) 11.9% (14) Deviation
1,545 1,722 1,538 1,566 1,587 1,691 1,745 1,817 Q1 FY15 Q2 FY15 Q3 FY15 Q4 FY15 Q1 FY16 Q2 FY16 Q3 FY16 Q4 FY16 Q1 FY17 Q2 FY17 Q3 FY17 Q4 FY17 84.2 87.4 92.8 92.7 97.8 101.0 103.4 107.0 113.4 115.2 118.1 120.5 India Equity Institutional Research II Result Update - Q4FY17 II 12 th May, 2017 4 Exhibit 2 Revenues and Margin Movement (INR. Bn) 140 120 100 80 30% 25% 20% 15% 60 10% 40 5% 20 0% 0-5% Total Revenue (Rs bn) Revenue Growth % OPM % NPM % Revenue in Rupee terms grew by 2.0% qoq at INR 120.5 Bn, and below our estimates of INR 122.1 Bn. Operating Margin was reported at 20.0%, which was 18 bps below our expectation of 19.9%. Management stated that it expects EBIT margins to be in the range of 19.5-20.5% in FY18E, and its profitability to grow further due to decrease in headcount, and increase in automation activities. Management stated FY18E revenue growth guidance to 10.5%-12.5% that is reduced from 11%-13%, a decline of 50 bps, which we believe is insignificant. Exhibit 3 US$ Revenue and Segment Revenue Growth Analysis ($. Mn) 1,850 1,800 1,750 1,700 1,650 1,600 1,550 1,500 1,450 1,400 1,350 Q1 FY16 Q2 FY16 Q3 FY16 Q4 FY16 Q1 FY17 Q2 FY17 Q3 FY17 Q4 FY17 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% -2% US$ Mn US$ Growth % Q-o-Q Core Soft. Revenue Growth % IT Infra. Revenue Growth % Dollar revenues were recorded at $1,817 Mn in Q4 FY17, up 4.1% qoq and up 14.5% yoy. The revenue growth for core software outpaced the revenue growth for IT infrastructure in Q4 FY17, primarily due to increase in adoption of cloud technology, and transferring workload to remote servers.
16.9% 16.9% 16.6% 16.4% 16.2% 16.5% 16.3% 16.7% 6,234 17.3% 17.8% 18.6% 17.9% 8,442 7,889 9,448 9,280 9,083 8,467 11,631 11,734 11,041 10,515 10,605 84.2% 84.5% 82.7% 82.9% 81.9% 83.5% 83.6% 84.7% 85.6% 85.8% 85.3% 84.6% India Equity Institutional Research II Result Update - Q4FY17 II 12 th May, 2017 5 Exhibit 4 Employee Addition and Utilization Trend 14,000 100% 12,000 90% 80% 10,000 70% 8,000 6,000 60% 50% 40% 4,000 30% 2,000 20% 10% 0 Q1 FY15 Q2 FY15 Q3 FY15 Q4 FY15 Q1 FY16 Q2 FY16 Q3 FY16 Q4 FY16 Q1 FY17 Q2 FY17 Q3 FY17 Q4 FY17 0% Gross Employee Addition Attrition (%) Blended Utilization (%) This quarter recorded a net employee addition of 10,605, taking the total headcount to 200,364. Blend Utilization was recorded at a strong 84.6% and displayed consistency above the 80% mark. Robust utilization rates coupled with reduced costs due to automation will translate into strong margin performance going ahead. Exhibit 5 US$ Revenue and Segment Revenue Growth Analysis ($. Mn) Client Profile Q4 FY15 Q1 FY16 Q2 FY16 Q3 FY16 Q4 FY16 Q1 FY17 Q2 FY17 Q3 FY17 Q4 FY17 $100 Mn + 7 7 7 7 8 7 8 8 8 $50 Mn+ 17 17 18 19 19 20 20 24 25 $40 Mn+ 22 23 24 26 29 32 34 35 34 $30 Mn+ 38 40 43 42 43 48 49 48 49 $20 Mn+ 73 73 75 74 75 80 82 87 85 $10 Mn+ 122 124 133 140 144 146 146 148 153 $5 Mn+ 206 211 224 227 233 237 235 241 246 $1 Mn 468 476 486 494 482 482 494 496 506 HCL Tech added 73 clients during FY17, where the majority of the clients added for $1 million category and $5 million categories with an increase of 24 and 13 clients respectively. Most notably, the company aded 1 client in the $50 Mn+ category and 1 client in $30 Mn+ category.
6 Exhibit 6 Q4 FY17: Geography QoQ Growth (%) Geography Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 FY15 FY16 FY16 FY16 FY16 FY17 FY17 FY17 FY17 US 0% 5% 1% 5% 4% 2% 5% 1% 5% Europe -2% 1% 5% -4% -4% 18% -5% 2% -3% Asia-Pacific 5% -1% -12% -4% 1% 7% -1% -2% 19% Asia-Pacific led the growth pack with 19% qoq growth. The growth was secular rather than cyclical, as large number of projects got completed in the quarter, which led the revenue to move up. Growth remained sluggish in Europe with a decline of 3% qoq. The US reported a growth of 5%, which is more of a cyclical growth. Exhibit 7 Q4 FY17: Vertical QoQ Growth (%) Verticals Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 FY15 FY16 FY16 FY16 FY16 FY17 FY17 FY17 FY17 Financial Service -2% 3% 1% 1% -2% 1% 4% 2% 4% Manufacturing & Hi-Tech 1% 1% 0% -2% 1% 13% -1% 7% 6% Telecom 7% 9% 2% 2% 3% -2% 5% -4% -2% Retail & CPG -13% 8% 0% 9% -2% 16% 6% -8% 2% Life Science 1% 11% 4% 0% 6% -1% 8% -3% 0% Other (Includes Energy utilities public sectors) 9% -4% 4% 7% 6% 12% -5% 4% 9% Manufacturing & Hi-tech vertical was the outperformer in Q4 FY17 with a growth of 6% qoq, followed by Financial Services at 4%. The company is expecting the growth for financial services to improve in FY18 due to increase in demand for banking and insurance services, as the company is a leading provider for financial solutions. Exhibit 8 Q4 FY17: Service Lines QoQ Growth (%) Services Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 FY15 FY16 FY16 FY16 FY16 FY17 FY17 FY17 FY17 Application Services -2% 2% -1% 1% 0% 2% 1% 1% 2% Engineering and R&D Services Infrastructure Services 0% 6% 0% 3% 3% 17% 3% 0% 1% 3% 2% 3% -2% 2% 1% 2% 6% 15% BPO Services 4% 5% 2% 5% -4% -16% 2% -1% 1% Engineering and R&D services has outperformed other services, which reported a growth of 15% FY17. The growth was primarily driven by the acquisition of Geometry. Infrastructure service and BPO service have seen a meager growth of 1% and 1% respectively, and they are expected to bounce back in the upcoming quarters. Application service is growing steadily, and it is expected to gain its momentum over the period in the back of digital and analytics space.
Exhibit 9 Q4 FY17: Profit & Loss Statement INR Mn FY15 FY16 FY17 FY18E FY19E Total Revenues 3,57,090 4,09,130 4,67,220 5,24,741 5,88,702 Revenue Growth (Y-o-Y) 13.5% 14.6% 14.2% 12.3% 12.2% Less: Employees Cost 2,25,830 2,67,810 3,08,890 3,41,738 3,83,597 SG&A 43,070 52,170 55,200 61,919 69,467 Total Op. Expenditure 2,68,900 3,19,980 3,64,090 4,03,658 4,53,064 EBIDTA 88,190 89,150 1,03,130 1,21,083 1,35,638 EBIDTA Growth (Y-o-Y) 9.3% 1.1% 15.7% 17.4% 12.0% Less: Depreciation 5,030 5,690 8,340 9,708 10,891 Operating Profit 83,160 83,460 94,790 1,11,375 1,24,747 Operating Profit Growth (Y-o-Y) 13.3% 0.4% 13.6% 17.5% 12.0% Non-operating Income 8,580 10,090 9,340 10,495 13,540 Profit Before tax 91,740 93,550 1,04,130 1,21,870 1,38,287 Tax 18,640 19,050 19,520 26,811 30,423 Share of Minority Interest 1 0 0 0 0 Net Profit 73,101 74,500 84,610 95,059 1,07,864 Adjusted Net Profit 73,101 74,500 84,610 95,059 1,07,864 Diluted EPS (Rs.) 51.7 52.8 59.8 67.2 76.3 Growth (Y-o-Y) % 27.7% 1.9% 13.4% 12.3% 13.5% Adjusted Diluted EPS 51.7 52.8 59.8 67.2 76.3 Growth (Y-o-Y) % 27.7% 1.9% 13.4% 12.3% 13.5% Exhibit 10 Q4 FY17: Balance Sheet INR Mn FY15 FY16 FY17 FY18E FY19E Equity Capital 3,504 3,758 3,763 3,763 3,763 Reserves & Surplus 2,34,930 2,71,577 3,23,995 3,82,887 4,49,711 Equity 2,38,435 2,75,335 3,27,759 3,86,650 4,53,474 Net Worth 2,38,435 2,75,335 3,27,759 3,86,650 4,53,474 Minority Interest 6 2,093 2,093 2,093 2,093 Net Deferred tax liability/(asset) 524 1,051 1,402 1,574 1,766 Other Non-current Liabilities 10,832 11,279 21,025 23,613 26,492 Total Loans 6,240 10,795 7,918 5,417 5,417 Capital Employed 2,56,037 3,00,552 3,60,196 4,19,348 4,89,242 Assets Gross Block 73,905 82,165 90,665 99,165 1,07,665 Less: Depreciation 37,109 39,368 47,708 57,416 68,307 Net Block 36,795 42,797 42,957 41,749 39,358 Investments 95 1,603 2,603 3,603 4,603 Intangible Assets 50,131 63,550 63,550 63,550 63,550 Other Non-current Assets 18,615 20,034 24,295 27,287 30,612 Deferred Income Tax Assets 10,921 18,365 20,826 24,374 27,657 Current Assets Inventories 1,518 2,618 3,808 4,213 4,729 Sundry Debtors 91,379 1,06,156 1,08,805 1,22,200 1,37,095 Cash and Bank Balance 1,02,067 97,683 1,57,148 2,04,618 2,62,930 Other Current Assets 32,497 40,898 32,705 36,732 41,209 Total Current Assets 2,27,461 2,47,355 3,02,467 3,67,763 4,45,963 Less: Current Liabilities Sundry Creditors 8,976 8,988 8,463 9,363 10,510 Provisions 9,727 10,307 15,620 18,281 20,743 Other Current Liabilities 69,278 73,857 72,419 81,335 91,249 Total Current Liabilities 87,981 93,152 96,501 1,08,978 1,22,501 Capital Applied 2,56,037 3,00,552 3,60,196 4,19,348 4,89,242 7
8 Exhibit 11 Q4 FY17: Ratio Analysis INR Mn FY15 FY16 FY17 FY18E FY19E Key Operating Ratios EBITDA Margin (%) 24.7% 21.8% 22.1% 23.1% 23.0% Tax / PBT (%) 20.3% 20.4% 18.7% 22.0% 22.0% Net Profit Margin (%) 20.5% 18.2% 18.1% 18.1% 18.3% RoE (%) 31.2% 27.5% 26.6% 25.3% 24.5% RoCE (%) 28.7% 25.5% 24.4% 23.3% 22.7% Current Ratio (x) 2.6x 2.7x 3.1x 3.4x 3.6x Dividend Payout (%) 38.0% 38.0% 38.0% 38.0% 38.0% BV Per Share (Rs.) 168.8 195.0 231.7 273.4 320.6 Financial Leverage Ratios Debt/ Equity (x) 0.03 0.04 0.02 0.01 0.01 Interest Coverage (x) Interest / Debt (%) Growth Indicators % Gross Block Growth (%) 8.4% 11.2% 10.3% 9.4% 8.6% Sales Growth (%) 13.5% 14.6% 14.2% 12.3% 12.2% EBITDA Growth (%) 9.3% 1.1% 15.7% 17.4% 12.0% Net Profit Growth (%) 27.6% 1.9% 13.6% 12.3% 13.5% Diluted EPS Growth (%) 27.7% 1.9% 13.4% 12.3% 13.5% Turnover Ratios Debtors days 93 95 85 85 85 Creditors days 12 10 8 8 8 Inventory Days 2 3 4 4 4 Exhibit 12 Q4 FY17: Free Cash Flow Analysis INR Mn FY15 FY16 FY17 FY18E FY19E EBITA 83,160 83,460 94,790 1,11,375 1,24,747 Less: Adjusted Taxes 16,897 16,995 17,769 24,503 27,444 NOPLAT 66,263 66,465 77,021 86,873 97,303 Plus: Depreciation 5,030 5,690 8,340 9,708 10,891 Gross Cashflow 71,293 72,155 85,361 96,580 1,08,194 Less: Increase in Working Capital 15,469 20,668-5,960 7,076 8,284 Operating Cashflow 55,825 51,486 91,321 89,505 99,910 Less: Net Capex 10,091 11,692 8,500 8,500 8,500 Less: Increase in Net Other Assets 5,715 19,222-3,376 3,778 3,539 FCF From Operation 40,018 20,572 86,197 77,227 87,871 Less: Inc./(Dec.) in Investment -69 1,508 1,000 1,000 1,000 FCF after Investment 40,087 19,064 85,197 76,227 86,871 Plus: Gain/(loss) on Extraordinary Items 0 0 0 0 0 Plus: Foreign currency Translation Effect Total FCF 40,087 19,064 85,197 76,227 86,871
9 Rating Legend Date CMP (INR) TP (INR) Recommendation Our Rating Upside 12-May-17 931 1,068 ACCUMULATE Buy More than 15% 25-Jan-17 848 985 BUY Accumulate 5% 15% 24-Oct-16 832 909 ACCUMULATE Hold 0 5% 04-Aug-16 826 924 ACCUMULATE Reduce -5% 0 Sell Less than 5% CERTIFICATION: I, Mayank Babla (MCom & BSc Economics & Management), research analyst, and Pritesh Thakkar (MBA, Bcom), research associate, author and the name subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect my views about the subject issuer(s) or securities. I also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Terms & Conditions and other disclosures: KRChoksey Shares and Securities Pvt. Ltd (hereinafter referred to as KRCSSPL) is a registered member of National Stock Exchange of India Limited, Bombay Stock Exchange Limited and MCX Stock Exchange Limited. 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