Ltd. RESULT UPDATE 29 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 29 th May, 2017 CMP INR 374 Target INR 473 Potential Upside 26.5% Market Cap (INR Mn) 418434 Expect performance to revive post H2FY18e Recommendation Buy Sector IT 2 Result highlights s results in Q4 FY17 were below our estimates on all fronts and largely disappointing. Dollar revenue was reported at $1,131 Mn, 1.4% up qoq, a meager 0.4% below our estimate of $1,135 Mn, while margins stood at 8.2%, down 406 bps qoq. By Geography: ROW outperformed with a qoq increase of 7.0% followed by Europe at 2%, whereas the US region has seen a decline of 2%. By Industry: BFSI has been the clear outperformer with an increase of 9.0% qoq, followed by Manufacturing at 8% qoq. However, Retail has seen a significant decline of 13% qoq followed by technology and telecom at 2% and 1% qoq respectively. MARKET DATA Shares Outs (Mn) 975 Equity Cap (INR Mn) 4873 Mkt Cap (INR Mn) 418434 52 Wk H/L (INR) 564/405 Volume Avg (3m K) 3557.0 Face Value (INR) 5 Bloomberg Code TECHM IN SHARE PRICE PERFORMANCE 120 95 70 Sensex MARKET INFO SENSEX 31028 NIFTY 9595 KEY FINANCIALS Particulars (INR Mn) FY15 FY16 FY17 FY18E FY19E Net Sales 2,24,779 2,64,941 2,91,408 3,25,230 3,62,533 EBITDA 41,144 43,336 41,843 45,777 52,392 PAT 26,278 31,180 28,409 31,596 36,336 EPS 27.1 32.4 29.6 32.9 37.8 OPM 15.6% 13.5% 11.0% 11.2% 11.6% NPM 11.7% 11.8% 9.7% 9.7% 10.0% Expect performance revival post H2FY18e TechM reported an EBIT of INR 8,987 Mn, which was 23% below our estimates and more than 420 bps down qoq due to 3 main reasons: (i) Restructuring of LCC business which attributed 180 bps of impact, (ii) Impact of 140 bps from restructuring of Legacy business and (iii) 40 bps currency impact. We expect margins to remain under pressure through H1 FY18e as management continues restructuring activities in legacy and LCC business by exiting nonperforming contracts and due to passing of impending wage hike. However, we expect margins to revive post H2FY18e as restructuring of LCC and legacy businesses are one-off expenses and due to absence of one off depreciation expenses going ahead. Management has stated that currently only 10% of services are enjoying automation initiatives and 20% of revenues are from Digital. We expect the company to scale up these statistics over FY18-19e. Key Concall Highlights: (i) The decline in revenues came mainly due to: cancellation of projects in communication business, and currency headwinds. (ii) The significant drop in operating margin came due to restructuring LCC contract that costs around $48 Mn FY17. (iii) The company is expected to incorporate digital solutions such as Automation, IoT, and Analytics for BFSI, Healthcare and Manufacturing verticals (iv) Depreciation expense was higher by 14% qoq largely due to purchase of software for internal and external usage and which requires to be expensed in the current time period as per IndAS. Valuation and view underperformed the estimates due to non-recurring charges related to restructuring of non-performing contracts. However, we believe that the company would revive growth with its aggressive move to penetrate emerging markets. The company is expected to complete LCC restructuring by H2FY18. 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 ~12.5x to its FY19E EPS to arrive at a price target of INR 473. SHARE HOLDING PATTERN (%) Particulars Mar 17 Dec 16 Sep 16 Promoters 36.21 36.24 36.29 FIIs 36.69 34.49 39.19 DIIs 13.12 15.23 10.72 11.5% 11.9% EBITDA CAGR between FY 17 Others 13.98 14.05 13.81 Total 100 100 100 Revenue CAGR between FY 17 and FY 19E and FY 19E
Q4FY17 Result Snapshot 3 Exhibit 1 Quarterly Income Statement Q4 Q3 Q-o-Q Q4 Y-o-Y Q4 FY17 INR Mn Deviation % FY17 FY17 change % FY16 change % estimates Net Sales (USD Mn) 1,131 1,116 1.4% 1,023 10.6% 1,135 (0.4%) Net Sales (INR Mn) 74,950 75,575 (0.8%) 67,011 11.8% 75,998 (1.4%) Less: Employees Remuneration & Benefits 54,785 52,352 4.6% 46,066 18.9% 53,535 2.3% Administrative & Other Expenses 11,178 11,358 (1.6%) 9,587 16.6% 10,792 3.6% Total Operating Expenditure 65,963 63,710 3.5% 55,653 18.5% 64,327 2.5% Operating Profit 8,987 11,865 (24.3%) 11,358 (20.9%) 11,671 (23.0%) Less: Depreciation 2,835 2,480 14.3% 1,736 63.3% 2,348 20.7% Less: Interest 318 349 (8.9%) 244 30.3% 347 (8.2%) Add: Other income 2,378 1,552 639 272.1% 1,578 Extraordinary Items 0 0-1 0 Profit Before Tax 8,212 10,588 (22.4%) 10,016 (18.0%) 10,555 (22.2%) Adjusted Profit Before Tax 8,212 10,588 (22.4%) 10,017 (18.0%) 10,555 (22.2%) Less: Total Tax 2,316 2,141 8.2% 2,327 (0.5%) 2,217 4.5% Minority Interest -17 111-97 76 Reported PAT 5,879 8,560 (31.3%) 7,592 (22.6%) 8,414 (30.1%) Adjusted PAT 5,879 8,558 (31.3%) 7,593 (22.6%) 8,414 (30.1%) Reported Diluted EPS (Rs.) 6.7 9.8 (31.3%) 7.9 (15.1%) 9.6 (30.1%) Adjusted Diluted EPS (Rs.) 6.7 9.8 (31.3%) 7.9 (15.1%) 9.6 (30.1%) No of Shared Diluted (mn) 876.5 876.5 960.8 876.5 Change Change Deviation Margin Analysis % EBIT Margin 8.2% 12.4% (421) 14.4% (615) 12.3% (406) EBIDTA Margin 15.8% 19.0% (321) 19.5% (377) 18.4% (267) NPM 7.8% 11.3% (348) 11.3% (349) 11.1% (323) Adjusted NPM 7.8% 11.3% (348) 11.3% (349) 11.1% (323) Effective Tax Rate % 28.2% 20.2% 798 23.2% 497 21.0% 720 Change Change Deviation Cost Analysis % Employee Cost/Net Sales 73.1% 69.3% 382 68.7% 435 70.4% 265 SG&A/Net sales 14.9% 15.0% (11) 14.3% 61 14.2% 71 The Tax rate for the quarter stood 28.2% in Q4FY17 DSO stood at 95 days in Q4 FY17 Client additions stood at 6 in Q4 FY17 with major additions in the $5 Mn and $10 Mn category Attrition stood at 17.0%, 100 bps improvement over previous quarter. Utilization was recorded at 81.0% and displayed consistency above the 80% mark. TechM has ~INR 50,000 Mn of cash on books
4 Exhibit 2 Revenues and Margin Movement (INR. Bn) Revenue has seen a degrowth of 0.8% qoq in reported terms at INR 74.9 Bn, 1.4% below our estimates. The revenue was primarily hit by: cancellation of projects from communication business as the company looks for high-value projects, trimming down certain non-performing services, and headwinds from the strengthening rupee in Q4 FY17. Apart from this, the Value Added Service (VAS) business remained a bit softer for the quarter that has affected the topline by INR 15-20 Mn, and it is expected to recover during FY18. The company's OPM and NPM have fallen by a significant margin due to restructuring of certain LCC accounts which costed $48 Mn in FY17. The company has mentioned that it would revive its margin by implementing automation and re-pricing certain contracts. We do not expect any impact from restructuring from H2 FY18e. Exhibit 3 US$ Revenue and Segment Revenue Growth Analysis ($. Mn) Dollar revenue recorded at $1,131 Mn in Q4 FY17, up 1.4% qoq. IT Services grew 1.4% qoq and BPO services grew 0.8% qoq. Revenue growth from IT services has fallen due to geopolitical issues, which the company is expected to recover by increasing its employee hiring offshore, and making them automation certified.
5 Exhibit 4 Employee Addition and Utilization Trend Gross employee addition stood at 598 in Q4, taking the total headcount to 1,17,693. Attrition reduced to 17% in Q4, improving from highs of 21% in Q1 FY17. Blend Utilization was recorded at 81.0%, and displayed consistency above the 80% mark. The company is focusing more on hiring and training the right skillsets, as the clients are demanding digital-oriented services such as cloud, automation, analytics rather than traditional IT services. Exhibit 5 US$ Revenue and Segment Revenue Growth Analysis ($. Mn) Client Profile Q4 FY15 Q1 FY16 Q2 FY16 Q3 FY16 Q4 FY16 Q1 FY17 Q2 FY17 Q3 FY17 Q4 FY17 $50 Mn+ 13 13 14 14 14 14 14 14 14 $20 Mn+ 35 36 36 37 40 42 40 38 36 $10 Mn+ 56 60 62 63 63 64 66 65 71 $5 Mn+ 96 101 102 105 112 120 120 128 134 $1 Mn 291 296 298 326 319 317 341 356 354 added 36 clients during FY17, where the majority of the clients added for $1 Mn and $5 Mn category, and 8 clients added in $10 Mn category.
6 Exhibit 6 Q4 FY17: Geography QoQ Growth (%) Geography Verticals Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 FY15 FY16 FY16 FY16 FY16 FY17 FY17 FY17 FY17 Telecom 16% -4% 3% -3% 0% -2% 2% 2% -1% Manufacturing -11% 4% 0% 3% 1% 7% 10% 0% 6% Technology, media & entertainment Banking, financial services & insurance Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 FY15 FY16 FY16 FY16 FY16 FY17 FY17 FY17 FY17 North America -1% 6% 5% -2% -1% 6% 2% 1% -2% Europe 1% -1% 2% -1% -1% 0% 9% 3% 2% Rest of the world 34% -7% -2% 6% 7% -7% 0% 13% 7% Geography-wise, ROW outperformed with a 7% qoq growth, followed by Europe at 2% qoq growth, whereas the US region has seen a degrowth of 2% qoq. The decline in growth from the US region was primarily due to the political issues, and currency headwinds. Exhibit 7 Q4 FY17: Vertical QoQ Growth (%) 2% 5% 15% -9% 2% 1% 0% -7% -2% -1% 10% -2% 2% 9% 8% 6% 19% 9% Retail, transport & logistics 3% 5% -6% 14% -8% 6% 9% 16% -13% Others 7% 9% 4% 16% 2% -4% -3% 9% 10% BFSI and Manufacturing segments outperformed in Q4 FY17. TME experienced some softness and was the primary reason for subdued growth in the US. 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 Q4 FY17: Profit & Loss Statement INR Mn FY15 FY16 FY17 FY18E FY19E Net Sales 2,24,779 2,64,941 2,91,408 3,25,230 3,62,533 Growth % 19.4% 17.9% 10.0% 11.6% 11.5% Total Revenue 2,24,779 2,64,941 2,91,408 3,25,230 3,62,533 Less: Software development expenses 1,50,734 1,83,316 2,05,661 2,32,295 2,56,124 Selling, marketing & General expenses 32,901 38,289 43,904 47,158 54,017 Total Operating Expenditure 1,83,635 2,21,605 2,49,565 2,79,453 3,10,141 EBIDTA 41,144 43,336 41,843 45,777 52,392 Growth % -1.7% 5.3% -3.4% 9.4% 14.4% Less: Depreciation 6,079 7,620 9,781 9,308 10,268 EBIT 35,065 35,716 32,062 36,469 42,123 Growth % -4.2% 1.9% -10.2% 13.7% 15.5% Non-operating Income 1,006 5,322 7,775 7,060 8,020 Extraordinary Income 285 14 0 0 0 Extraordinary Expense 0 0 0 0 0 Profit Before tax 36,059 40,181 38,551 42,280 48,932 Tax 9,471 8,600 9,785 10,359 12,233 Minority Interest -310-401 -357-325 -363 Net Profit 26,278 31,180 28,409 31,596 36,336 Adjusted Profit 25,993 31,166 28,409 31,596 36,336 Reported Diluted EPS Rs 27.4 32.5 29.6 32.9 37.8 Growth % -13.2% 18.7% -8.9% 11.2% 15.0% Adjusted Diluted EPS Rs 27.1 32.4 29.6 32.9 37.8 Growth % -10.6% 19.9% -8.8% 11.2% 15.0% 7 Exhibit 9 Q4 FY17: Balance Sheet INR Mn FY15 FY16 FY17 FY18E FY19E Liabilities Equity Capital 4,804 4,839 4,839 4,839 4,839 Reserves & Surplus 1,17,682 1,25,611 1,30,768 1,39,113 1,52,198 Equity 1,22,486 1,30,450 1,35,607 1,43,952 1,57,037 Preference Share Capital 0 0 0 0 0 Net Worth 1,22,486 1,30,450 1,35,607 1,43,952 1,57,037 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 1,41,395 1,52,297 1,58,008 1,66,763 1,80,318 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 44,282 38,780 39,477 41,144 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 1,39,809 1,53,595 1,58,534 1,70,681 1,84,904 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 1,41,395 1,52,297 1,58,008 1,66,763 1,80,318
Exhibit 10 Q4 FY17: Ratio Analysis 8 INR Mn FY15 FY16 FY17 FY18E FY19E Key Operating Ratios EBITDA Margin (%) 18.3% 16.4% 14.4% 14.1% 14.5% Tax / PBT (%) 26.3% 21.4% 25.4% 24.5% 25.0% Net Profit Margin (%) 11.7% 11.8% 9.7% 9.7% 10.0% RoE (%) 22.1% 22.6% 19.6% 20.9% 22.4% RoCE (%) 19.0% 20.1% 17.6% 18.7% 20.1% Current Ratio (x) 2.4x 2.2x 2.1x 2.1x 2.1x Dividend Payout (%) 80.4% 74.6% 81.8% 73.6% 64.0% Book Value Per Share (Rs.) 127.5 135.8 141.1 149.8 163.4 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 36.7x 43.2x Interest / Debt (%) 91.3% 71.8% 65.4% 66.9% 72.7% Growth Indicators % Sales Growth (%) 19.4% 17.9% 10.0% 11.6% 11.5% EBITDA Growth (%) (1.7%) 5.3% (3.4%) 9.4% 14.4% Net Profit Growth (%) (13.2%) 18.7% (8.9%) 11.2% 15.0% Diluted EPS Growth (%) (13.2%) 18.7% (8.9%) 11.2% 15.0% Turnover Ratios Debtors (Days of net sales) 85 79 80 78 77 Creditors (Days of Raw Materials) 41 37 36 35 34 Inventory (Days of Optg. Costs) 0 1 1 1 0 Exhibit 11 Q4 FY17: Free Cash Flow Analysis INR Mn FY15 FY16 FY17 FY18E FY19E EBITA 35,065 35,716 32,062 36,469 42,123 Less: Adjusted Taxes 9,210 7,644 8,138 8,935 10,531 NOPLAT 25,855 28,072 23,924 27,534 31,592 Plus: Depreciation 6,079 7,620 9,781 9,308 10,268 Less: Increase in Working Capital 15,600-835 5,569 6,244 6,896 Operating Cashflow 16,334 36,526 28,136 30,599 34,965 Less: Net Capex 11,679 11,371 13,692 9,308 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 18,826 18,986 Less: Inc./(Dec.) in Investment 0 0 0 0 0 FCF after Investment 3,187 19,794 12,204 18,826 18,986 Plus: Gain/(loss) on Extraordinary Items 210 11 0 0 0 Total FCF 3,397 19,805 12,204 18,826 18,986 EBITA 35,065 35,716 32,062 36,469 42,123 Exhibit 12 Q4 FY17: Free Cash Flow Analysis YE March (Rs. mn) FY15 FY16 FY17 FY18E FY19E P/E (x) 13.7x 11.5x 12.6x 11.4x 9.9x P/BV (x) 2.9x 2.8x 2.6x 2.5x 2.3x EV/EBIDTA (x) 7.7x 7.3x 7.7x 7.0x 6.1x EV/Sales 1.4x 1.2x 1.1x 1.0x 0.9x Market Cap./ Sales (x) 1.6x 1.4x 1.2x 1.1x 1.0x Dividend Yield (%) 5.9% 6.5% 6.5% 6.5% 6.5%
9 Ltd. Rating Legend Date CMP (INR) TP (INR) Recommendation Our Rating Upside 29-May-17 374 473 BUY Buy More than 15% 31-Jan-17 472 513 ACCUMULATE Accumulate 5% 15% 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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