Ltd. RESULT UPDATE 1 st August, 2017
Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 India Equity Institutional Research II Result Update - Q1FY18 II 1st August, 2017 CMP INR 403 MARKET DATA Target INR 473 Potential Upside 17% Shares Outs (Mn) 976 Equity Cap (INR Mn) 4878 Mkt Cap (INR Mn) 375887 52 Wk H/L (INR) 515/358 Volume Avg (3m K) 2641.9 Face Value (INR) 5 Bloomberg Code SHARE PRICE PERFORMANCE TECHM IN Market Cap (INR Mn) 375,887 KEY FINANCIALS Recommendation Buy Result highlights s results in Q1 FY18 was a mixed bag with revenue marginally below our estimates whereas profitability was a beat. Dollar revenue was reported at $1,138 Mn, 0.6% up qoq, a meager 0.6% below our estimate of $1,145 Mn, while EBIT margins stood at 9.4%, 53 bps above our estimates. By Geography: N. America was the outperformer with a 4.4% qoq growth followed by Europe at 1.3% qoq By Industry: Retail, Transport & Logistics led the pack with 5.3% qoq growth whereas BFSI vertical growth was softened at 2.8% post stellar performance in the previous quarter 120 105 90 Expect performance to revive post H2FY18e Sector IT Particulars (INR Mn) FY15 FY16 FY17 FY18E FY19E Net Sales 224,779 264,941 291,408 309,358 344,809 EBITDA 41,144 43,336 41,843 45,057 50,062 PAT 26,278 31,180 28,409 31,382 34,816 EPS 27.4 32.5 29.6 32.7 36.2 OPM -4.2% 1.9% -10.2% 7.1% 15.9% NPM 11.7% 11.8% 9.7% 10.1% 10.1% Expect performance revival post H2FY18e TechM reported an EBIT of INR 6,879 Mn, which was 2.9% above our estimates and up 110 bps qoq due to: (i) 120 bps positive impact from cross-currency tailwinds as USD depreciated against the Euro and GBP and (ii) lower depreciation expense as Q4FY17 had a higher depreciation expense due to software purchases. Management commentary indicated that margin pressure will fade away from current quarter as major restructuring expenses (for network services business) have already been incurred. Expect company to issue a wage hike next quarter with a 30-40 bps impact on margins which are expected to be offset by tailwinds. PAT stood at INR 7,987 Mn up 36% qoq mainly due to foreign exchange gains of $42 Mn vs $24 Mn last quarter and Sale of Land in Pune worth $9 Mn. 2 75 Sensex Key Concall Highlights: (i) BFSI and Manufacturing segments showed good growth during the quarter and expect this trend to continue going ahead (ii) TCV of deals in the current quarter stood at $325 Mn in Q1FY18 (iii) Amalgamation of HCI group complete and TechM has ingested 700 associates from the company and it gives access to an under-served Hospital Systems market (v) See performance of Comviva improving as services are broadened to other verticals (vi) Tax at 25.4%, expect tax rate to be around similar levels through FY18E. MARKET INFO SENSEX 32575 NIFTY 10115 Valuation and view We believe that 3 main triggers for Communications space over the next few years are Higher video/content streaming over various distribution channels, IoT and 5G rollout and will serve to be major growth drivers for TechM going ahead. Restructuring in Network Services business is largely complete. Hence, we are expecting the recovery process to continue through FY18E. We believe that the management s stance on aggressively pursuing Digital, Automation, Innovation and Disruption is a right one and will drive revenue growth along with profitability. We have a Buy rating on the stock as we assign a multiple of ~13x to its FY19E EPS to arrive at a price target of INR 473. SHARE HOLDING PATTERN (%) Particulars Jun 17 Mar 17 Dec 16 Promoters 36.16 36.21 36.24 FIIs 35.18 36.69 34.49 DIIs 14.35 13.12 15.23 8.8% 9.4% EBITDA CAGR between FY 17 Others 14.31 13.98 14.05 Total 100 100 100 Revenue CAGR between FY 17 and FY 19E and FY 19E
Q4FY17 Result Snapshot 3 Exhibit 1: Quarterly Income Statement Q1 Q4 Q-o-Q Q1 Y-o-Y Q4 FY17 INR Mn Deviation % FY18 FY17 change % FY17 change % estimates Net Sales (USD Mn) 1,138 1,131 0.6% 1,032 10.3% 1,145 (0.6%) Net Sales (INR Mn) 73,361 74,950 (2.1%) 69,209 6.0% 75,539 (2.9%) Less: Employees Remuneration & Benefits 52,818 54,785 (3.6%) 48,807 8.2% 55,576 (5.0%) Administrative & Other Expenses 11,196 11,178 0.2% 10,112 10.7% 10,953 2.2% Total Operating Expenditure 64,014 65,963 (3.0%) 58,919 8.6% 66,529 (3.8%) Operating Profit 9,347 8,987 4.0% 10,290 (9.2%) 9,009 3.8% Less: Depreciation 2,468 2,835 (12.9%) 2,019 22.2% 2,327 6.1% Less: Interest 370 318 16.4% 274 35.0% 316 17.2% Add: Other income 4,107 2,378 72.7% 2,458 67.1% 1,675 Extraordinary Items 0 0 0 0 Profit Before Tax 10,616 8,212 29.3% 10,455 1.5% 8,041 32.0% Adjusted Profit Before Tax 10,616 8,212 29.3% 10,455 1.5% 8,041 32.0% Less: Total Tax 2,698 2,316 16.5% 2,468 9.3% 2,010 34.2% Minority Interest 69-17 -464-76 Reported PAT 7,987 5,879 35.9% 7,500 6.5% 5,955 34.1% Adjusted PAT 7,987 5,879 35.9% 7,523 6.2% 5,955 34.1% Reported Diluted EPS (Rs.) 9.1 6.7 35.9% 7.8 16.7% 6.8 34.1% Adjusted Diluted EPS (Rs.) 9.1 6.7 35.9% 7.8 16.4% 6.8 34.1% No of Shared Diluted (mn) 876.5 876.5 960.8 876.5 Change Change Deviation Margin Analysis % EBIT Margin 9.4% 8.2% 117 12.0% (257) 8.8% 53 EBIDTA Margin 16.1% 15.8% 33 17.8% (168) 15.0% 110 NPM 10.9% 7.8% 304 10.8% 5 7.9% 300 Adjusted NPM 10.9% 7.8% 304 10.9% 2 7.9% 300 Effective Tax Rate % 25.4% 28.2% (279) 23.6% 181 25.0% 41 Change Change Deviation Cost Analysis % Employee Cost/Net Sales 72.0% 73.1% (110) 70.5% 148 73.6% (158) SG&A/Net sales 15.3% 14.9% 35 14.6% 65 14.5% 76 The Tax rate for the quarter stood 25.4% in Q4FY17 DSO stood at 104 days in Q1 FY18 Client additions stood at 21 in Q1 FY18 with major additions in the $20 Mn and $5 Mn category Attrition stood at 17.0%, in-line with the previous quarter. Utilization was recorded at 81.0% and displayed consistency above the 80% mark. TechM has ~INR 60,164 Mn of cash on books
924 985 989 1,011 1,015 1,023 1,032 1,072 1,116 1,131 1,138 India Equity Institutional Research II Result Update - Q1FY18 II 1st August, 2017 Exhibit 2: Revenues and Margin Movement (INR. Bn) 4 80 70 60 50 40 30 20 10 0 Q1 FY15 Q3 FY15 Q1 FY16 Q3 FY16 Q1 FY17 Q3 FY17 Q1FY18 20% 15% 10% 5% 0% -5% Total Revenue(Rs bn) Revenue Growth % OPM % NPM % Revenue has seen a degrowth of 2.1% qoq in reported terms at INR 73.3 Bn, 2.9% below our estimates which was mainly due to depreciation of the rupee. The revenue was primarily hit by: cancellation of projects from network services business as the company looks for high-value projects, trimming down certain non-performing services. Apart from this, company expects to expand Comviva business by expanding service offerings to Financial Services segment as well. The company's OPM and NPM bounced back during the quarter due to cross currency tailwinds and reduction in Employee Costs due to reduction in Software Professionals. The company has mentioned that margin pressure will fade away as restructuring costs are complete and other margin levers are in play. We expect very marginal impact from restructuring from Q2FY18e if any. Exhibit 3: US$ Revenue and Segment Revenue Growth Analysis ($. Mn) 1,200 1,000 800 600 400 200 0 Q3 FY15 Q4 FY15 Q1 FY16 Q2 FY16 Q3 FY16 Q4 FY16 Q1 FY17 Q2 FY17 Q3 FY17 Q4 FY17 Q1 FY18 120% 100% 80% 60% 40% 20% 0% -20% -40% -60% US$ Mn US$ Growth % Q-o-Q IT Serv. Revenue Growth % BPO Revenue Growth % Dollar revenue recorded at $1,138 Mn in Q1 FY18, up 0.6% qoq. IT Services grew 1.1% qoq and BPO services declined by 6.4% qoq. Revenue growth from IT services has fallen due to geopolitical issues, which the company is expected to recover by increasing its employee hiring offshore, and making them automation certified.
-1,705-1,713 392 1,562 1,902 1,784 5,670 4,209 598 India Equity Institutional Research II Result Update - Q1FY18 II 1st August, 2017 5 Exhibit 4: Employee Addition and Utilization Trend 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0-1,000-2,000-3,000 Q1 FY16 Q2 FY16 Q3 FY16 Q4 FY16 Q1 FY17 Q2 FY17 Q3 FY17 Q4 FY17 Q1FY18 84.0% 82.0% 80.0% 78.0% 76.0% 74.0% 72.0% 70.0% 68.0% Net Employee Addition Utilization including Trainees % Utilization excluding Trainees % Net reduction in employees stood at -1,713 in Q1, taking the total headcount to 1,15,980. Attrition reduced to 17% in Q4, stabilized from highs of 21% in Q1 FY17. Blend Utilization was recorded at 81.0%, and displayed consistency above the 80% mark. The company is focusing more on hiring and training the right skillsets, as the clients are demanding digital-oriented services such as cloud, automation, analytics rather than traditional IT services. Exhibit 5: US$ Revenue and Segment Revenue Growth Analysis ($. Mn) Client Profile Q1 FY16 Q2 FY16 Q3 FY16 Q4 FY16 Q1 FY17 Q2 FY17 Q3 FY17 Q4 FY17 Q1 FY18 $50 Mn+ 13 14 14 14 14 14 14 14 14 $20 Mn+ 36 36 37 40 42 40 38 36 41 $10 Mn+ 60 62 63 63 64 66 65 71 74 $5 Mn+ 101 102 105 112 120 120 128 134 139 $1 Mn 296 298 326 319 317 341 356 354 377 added 21 clients during FY18, where the majority of the clients added for $1 Mn and $5 Mn category, and 23 clients added in $1 Mn category.
Exhibit 6 Q1 FY18: Geography QoQ Growth (%) 6 Geography Geography-wise, North America outperformed with a 4.4% qoq growth, followed by Europe at 1.3% qoq growth, whereas the RoW has seen a significant decline of 6.9% qoq. The decline in growth from the US region was primarily due to the protectionism policies, and weakening dollar against rupee. Exhibit 7 Q1 FY18: Vertical QoQ Growth (%) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 FY16 FY16 FY16 FY16 FY17 FY17 FY17 FY17 FY18 North America 6% 5% -2% -1% 6% 2% 1% -2% 4.4% Europe -1% 2% -1% -1% 0% 9% 3% 2% 1.3% Rest of the world -7% -2% 6% 7% -7% 0% 13% 7% -6.9% Verticals Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 FY16 FY16 FY16 FY16 FY17 FY17 FY17 FY17 FY18 Telecom -4% 3% -3% 0% -2% 2% 2% -1% -1.8% Manufacturing 4% 0% 3% 1% 7% 10% 0% 6% 1.1% Technology, media & entertainment Banking, financial services & insurance 5% 15% -9% 2% 1% 0% -7% -2% -2.6% 10% -2% 2% 9% 8% 6% 19% 9% 2.8% Retail, transport & logistics 5% -6% 14% -8% 6% 9% 16% -13% 5.3% Others 9% 4% 16% 2% -4% -3% 9% 10% 8.4% BFSI and Manufacturing segments outperformed in Q1 FY18. Retail and BFSI grew by 5.3% and 2.8% qoq, whereas TME saw a sharp decline of 2.6% in Q1FY18. The growth is expected to continue from the next quarter on the back of incorporating digital solutions to some of its verticals such as Manufacturing, BFSI and Healthcare.
Exhibit 8 Q1 FY18: Profit & Loss Statement INR Mn FY15 FY16 FY17 FY18E FY19E Net Sales 224,779 264,941 291,408 309,358 344,809 Growth % 19.4% 17.9% 10.0% 6.2% 11.5% Total Revenue 224,779 264,941 291,408 309,358 344,809 Less: Software development expenses 150,734 183,316 205,661 217,705 243,026 Selling, marketing & General expenses 32,901 38,289 43,904 46,595 51,721 Total Operating Expenditure 183,635 221,605 249,565 264,300 294,747 EBIDTA 41,144 43,336 41,843 45,057 50,062 Growth % -1.7% 5.3% -3.4% 7.7% 11.1% Less: Depreciation 6,079 7,620 9,781 10,723 10,268 EBIT 35,065 35,716 32,062 34,334 39,793 Growth % -4.2% 1.9% -10.2% 7.1% 15.9% Non-operating Income 1,006 5,322 7,775 9,882 8,540 Extraordinary Income 285 14 0 0 0 Extraordinary Expense 0 0 0 0 0 Profit Before tax 36,059 40,181 38,551 42,615 46,882 Tax 9,471 8,600 9,785 10,830 11,720 Minority Interest (310) (401) (357) (403) (345) Net Profit 26,278 31,180 28,409 31,382 34,816 Adjusted Profit 25,993 31,166 28,409 31,382 34,816 Reported Diluted EPS Rs 27.4 32.5 29.6 32.7 36.2 Growth % -13.2% 18.7% -8.9% 10.5% 10.9% Adjusted Diluted EPS Rs 27.1 32.4 29.6 32.7 36.2 Growth % -10.6% 19.9% -8.8% 10.5% 10.9% Exhibit 9 Q1 FY18: Balance Sheet INR Mn FY15 FY16 FY17 FY18E FY19E Liabilities Equity Capital 4,804 4,839 4,839 4,839 4,839 Reserves & Surplus 117,682 143,055 159,934 181,902 206,273 Equity 122,486 147,894 164,773 186,741 211,112 Net Worth 122,486 147,894 164,773 186,741 211,112 Minority Interest 1,604 2,034 2,034 2,034 2,034 Net Deferred tax liability/(asset) 440 231 254 280 307 Total Loans 460 1,967 1,967 1,767 1,567 Long term Provisions 4,101 5,311 5,842 6,426 7,069 Amount Pending Investigation 12,304 12,304 12,304 12,304 12,304 Capital Employed 141,395 169,741 187,175 209,551 234,394 Assets Net Block 22,044 25,178 29,089 29,089 32,089 Capital WIP 5,677 6,294 6,294 6,294 6,294 Investments 12,987 13,244 13,244 13,244 13,244 Intangible Assets 1,002 911 911 911 911 Others - A 16,962 22,635 24,899 27,388 30,127 Current Assets Inventories 245 414 414 414 414 Sundry Debtors 52,059 57,705 63,476 69,823 76,805 Cash and Bank Balance 41,332 61,726 67,946 82,266 95,219 Loans and Advances 18,728 17,084 18,792 20,672 22,739 Other Current Assets 27,445 34,110 37,073 40,296 43,802 Total Current Assets 139,809 171,039 187,700 213,470 238,979 Less:Current Liabilities & Provisions Sundry Creditors 20,587 22,755 24,575 26,541 28,665 Provisions 17,987 24,093 26,502 29,153 32,068 Other Current Liabilities 18,512 22,712 23,885 25,151 26,519 Total Current Liabilities & Provisions 57,086 69,560 74,962 80,845 87,251 Capital Applied 141,395 169,741 187,175 209,551 234,394 7
Exhibit 10 Q1 FY18: Ratio Analysis INR Mn FY15 FY16 FY17 FY18E FY19E Key Operating Ratios EBITDA Margin (%) 18.3% 16.4% 14.4% 14.6% 14.5% Tax / PBT (%) 26.3% 21.4% 25.4% 25.4% 25.0% Net Profit Margin (%) 11.7% 11.8% 9.7% 10.1% 10.1% RoE (%) 23.6% 22.6% 17.5% 17.4% 17.1% RoCE (%) 20.1% 20.1% 15.9% 16.0% 15.8% Current Ratio (x) 2.4x 2.5x 2.5x 2.6x 2.7x Dividend Payout (%) 21.9% 18.6% 40.6% 30.0% 30.0% Book Value Per Share (Rs.) 127.5 153.9 171.5 194.4 219.7 Financial Leverage Ratios Debt/ Equity (x) 0.0x 0.0x 0.0x 0.0x 0.0x Interest Coverage (x) 138.5x 49.8x 32.5x 28.2x 34.5x Interest / Debt (%) 91.3% 71.8% 65.4% 85.7% 87.1% Growth Indicators % Sales Growth (%) 19.4% 17.9% 10.0% 6.2% 11.5% EBITDA Growth (%) (1.7%) 5.3% (3.4%) 7.7% 11.1% Net Profit Growth (%) (13.2%) 18.7% (8.9%) 10.5% 10.9% Diluted EPS Growth (%) (13.2%) 18.7% (8.9%) 10.5% 10.9% Turnover Ratios Debtors (Days of net sales) 85 79 80 82 81 Creditors (Days of Raw Materials) 41 37 36 37 35 Inventory (Days of Optg. Costs) 0 1 1 1 1 Exhibit 11 Q1 FY18: Free Cash Flow Analysis INR Mn FY15 FY16 FY17 FY18E FY19E EBITA 35,065 35,716 32,062 34,334 39,793 Less: Adjusted Taxes 9,210 7,644 8,138 8,726 9,948 NOPLAT 25,855 28,072 23,924 25,608 29,845 Plus: Depreciation 6,079 7,620 9,781 10,723 10,268 Less: Increase in Working Capital 15,600 (835) 5,569 5,926 6,859 Operating Cashflow 16,334 36,526 28,136 30,405 33,255 Less: Net Capex 11,679 11,371 13,692 10,723 13,268 Less: Increase in Net Other Assets 1,468 5,361 2,240 2,464 2,711 FCF From Operation 3,187 19,794 12,204 17,218 17,275 Less: Inc./(Dec.) in Investment 0 0 0 0 0 FCF after Investment 3,187 19,794 12,204 17,218 17,275 Plus: Gain/(loss) on Extraordinary Items 210 11 0 0 0 Total FCF 3,397 19,805 12,204 17,218 17,275 8 Exhibit 12 Q1 FY18: Valuation Ratios YE March (Rs. mn) FY15 FY16 FY17 FY18E FY19E P/E (x) 14.1x 11.9x 13.0x 11.8x 10.6x P/BV (x) 3.0x 2.5x 2.2x 2.0x 1.8x EV/EBIDTA (x) 8.0x 7.2x 7.3x 6.4x 5.5x EV/Sales 1.5x 1.2x 1.0x 0.9x 0.8x Market Cap./ Sales (x) 1.6x 1.4x 1.3x 1.2x 1.1x Dividend Yield (%) 1.6% 1.6% 3.1% 2.5% 2.8%
9 Ltd. Rating Legend Date CMP (INR) TP (INR) Recommendation Our Rating Upside 1-Aug-17 403 473 BUY Buy More than 15% 29-May-17 374 473 BUY Accumulate 5% 15% 31-Jan-17 472 513 ACCUMULATE Hold 0 5% 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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