3QFY2016 Result Update | IT

May 17, 2016

HCL Technologies

BUY

CMP

`722

Performance Highlights

Target Price

`1,000

(` cr) - Consl.

3QFY16 2QFY16

% chg (qoq) 3QFY15

% chg (yoy)

Investment Period

12 Months

Net revenue

10,698

10,341

3.4

9,267

15.4

EBIT

2,222

2,072

7.2

1,978

12.3

Stock Info

Adj. EBITDA margin (%)

20.8

20.6

73bp

21.3

(57)bp

Sector

PAT

1,925

1,920

0.3

1,683

14.4

Market Cap (` cr)

101,878

Source: Company, Angel Research

Net Debt (` cr)

(101,878)

After this quarter (3QFY2016), the company has migrated to March year-ending.

Beta

0.7

For 3QFY2016, HCL Technologies (HCL Tech) posted lower than expected

52 Week High / Low

1,048/707

numbers on the top-line as well as the bottom-line front. It reported a top-line

Avg. Daily Volume

144,915

growth of 1.3% QoQ to US$1,587mn V/s US$1,607mn expected. In constant

Face Value (`)

currency (CC) terms, the growth was of 1.7% QoQ. On the operating front, the

BSE Sensex

25,490

EBIT margin came in at 20.8%, in line with our expectations. The net profit came

Nifty

7,815

in flat on a QoQ basis at `1,926cr (V/s `1,936cr expected). On the operational

Reuters Code

HCLT.BO

front, the utilization level moved up to 85.6% V/s 84.7% in 2QFY2016, while the

Bloomberg Code

HCLT@IN

attrition rate for IT services came in at 17.3% V/s 16.7% in 2QFY2016. We

maintain our Buy recommendation on the stock with a price target of `1,000.

Shareholding Pattern (%)

Quarterly highlights: The company posted a 1.3% QoQ growth for the quarter to

Promoters

60.4

US$1,587mn (V/s US$1,607mn expected). In rupee terms, the company posted a

MF / Banks / Indian Fls

8.8

sales growth of 3.4% QoQ to `10,698cr (V/s `10,850cr expected) while in CC

FII / NRIs / OCBs

27.5

terms the growth was of 1.7% QoQ. In terms of geographies, the company

Indian Public / Others

3.3

posted 3.7%, (2.4)% and 1.3% QoQ growth in USA, Europe and ROW in CC

terms respectively. In terms of verticals, the company posted a QoQ CC growth of

-1.3%, 0.9%, 6.4%, 7.1%, -1.2%, 4.2% in Financial Services, Manufacturing, Life

Abs.(%)

1yr

3yr

sciences & Healthcare, Public Services, Retail & CPG and Telecommunications,

Sensex

10.9

(5.2)

29.4

Media, Publishing & Entertainment (MPE) respectively. On the operating front, the

HCL Tech

(9.5)

(21.1)

90.7

EBIT margin came in at 20.8%, in line with our expectation. The net profit grew

0.3% QoQ to `1,926cr (V/s `1,936cr expected).

3-year price chart

Outlook and valuation: We expect HCL Tech to post a USD and INR revenue

1,200.0

CAGR of 12.5% and 15.5%, respectively, over FY2015-18E. On back of strong

1,000.0

order book and given the attractive valuations, we recommend a Buy on the stock.

800.0

Key financials (Consolidated, US GAAP)

600.0

Y/E March (` cr)

FY2015

FY2016

FY2017E

FY2018E

400.0

Net sales

37,061

30,781

49,242

57,168

200.0

% chg

12.6

(16.9)

60.0

16.1

0.0

Net profit

7,253

5,643

7,862

9,037

% chg

17.2

(22.2)

39.3

14.9

EBITDA margin (%)

23.5

21.5

20.5

Source: Company, Angel Research

EPS (`)

51.4

40.0

55.7

64.1

P/E (x)

14.0

18.0

12.9

11.2

P/BV (x)

4.1

3.6

2.6

2.0

RoE (%)

29.3

20.1

20.3

17.9

RoCE (%)

23.1

15.6

17.2

15.9

Sarabjit kour Nangra

EV/Sales (x)

2.4

2.9

1.6

1.2

+91 22 3935 7800 Ext: 6806

EV/EBITDA (x)

10.4

13.7

7.7

5.6

[email protected]

Source: Company, Angel Research; Note: CMP as of May 13, 2016

Please refer to important disclosures at the end of this report

HCL Technologies | 3QFY2016 Result Update

Exhibit 1: 3QFY2016 performance (Consolidated, US GAAP)

Y/E March (` cr)

3QFY16

2QFY16

% chg (qoq)

3QFY15

% chg (yoy)

FY16

FY15

% chg(yoy)

Net revenue

10,698

10,341

3.4

9,267

15.4

40,913

35,708

14.6

Cost of revenue

6,961

6,768

2.9

5,997

16.1

26,901

22,583

19.1

Gross profit

3,737

3,573

4.6

3,270

14.3

14,012

13,125

6.8

SG&A expense

1,358

1,348

0.7

1,179

15.2

5,217

4,308

21.1

EBITDA

2,378

2,225

6.9

2,091

13.7

8,795

8,817

(0.2)

Dep. and amortization

157

153

2.6

113

38.9

569

504

12.9

EBIT

2,222

2,072

7.2

1,978

12.3

8,226

8,313

(1.0)

Other income

200

355

(43.7)

179

11.7

1,009

856

PBT

2,422

2,427

(0.2)

2,157

12.3

9,235

9,169

0.7

Income tax

497

508

(2.2)

473

5.1

1,883

1,864

1.0

PAT

1,925

1,920

0.3

1,683

14.4

7,352

7,305

0.6

Forex gain/(loss)

Adjusted PAT

1,925

1,920

0.3

1,683

14.4

7,352

7,305

0.6

EPS

13.6

0.3

11.9

14.4

52.3

52.0

0.6

Gross margin (%)

34.9

34.6

38bp

35.3

(35)bp

34.2

36.8

(251)bp

EBITDA margin (%)

22.2

21.5

71bp

22.6

(34)bp

21.5

24.7

(320)bp

EBIT margin (%)

20.8

20.0

73bp

21.3

(57)bp

20.1

23.3

(317)bp

PAT margin (%)

18.0

18.6

(57)bp

18.2

(17)bp

18.0

20.5

(249)bp

Source: Company, Angel Research, Note-FY2016 is a 12month results for meaningful comparison, From FY2017, the company has become a March

ending company

Exhibit 2: 3QFY2016 - Actual Vs Angel estimates

(` cr)

Actual

Estimate

Variation (%)

Net revenue

10,698

10,850

(1.4)

EBITDA margin (%)

20.8

20.7

10bp

PAT

1,925

1,936

(0.6)

Source: Company, Angel Research

Sales lower than expected

The company posted a 1.3% QoQ growth for the quarter to US$1,587mn (V/s

US$1,607mn expected). In rupee terms, the company posted a sales growth of

3.5% QoQ to `10,698cr (V/s `10,850cr expected) while in CC terms the growth

was of 1.7% QoQ. In terms of geographies, the company posted 3.7 %,(2.4)% and

1.3% QoQ growth in USA, Europe and ROW in CC terms respectively. In terms of

verticals, the company posted a QoQ CC growth of (1.3%), 0.9%, 6.4%, 7.1%,

(1.2%),

4.2% in Financial Services, Manufacturing, Life sciences & Healthcare,

Public Services, Retail & CPG and Telecommunications, Media, Publishing &

Entertainment (MPE) respectively.

The company signed 7 transformational deals during the quarter with TCV of more

than US$2bn, taking the number of transformational engagements during the nine

month financial year to 25 with TCV of more than US$4bn. These wins were

broad-based across service lines and industry verticals, led by the company’s next-

generation offerings - BEYONDigital, IoT WoRKS and Next-Gen ITO.

May 17, 2016

HCL Technologies | 3QFY2016 Result Update

Exhibit 3: Revenue growth trend

1,700

3.1

1,600

1,500

1,400

1,300

1.4

1.3

1,200

1,100

0.5

1,491

1,538

1,545

1,566

1,587

1,000

0.0

3QFY15

4QFY15

1QFY2016

2QFY2016

3QFY16

Revenue (USD)

qoq growth (%)

Source: Company, Angel Research

In terms of services, the Engineering & R&D services (which constitute 18.6% of

sales) posted a growth

1.9% QoQ (CC), while Application services (which

constitute 40.4% of sales) grew by 0.5% QoQ in CC terms. Infrastructure services,

another important segment of the company, which contributes by around 18.6% to

overall sales, posted a growth of 3.9% QoQ. Business services, which constitute

5.5% of sales, de-grew by 4.1% QoQ on CC basis.

Exhibit 4: Revenue growth trend (Service wise)

% of revenue

% growth CC (qoq)

% growth (yoy)

Application services

40.4

0.5

4.0

Infrastructure services

18.6

3.9

14.0

Business services

5.5

(4.1)

10.1

Engineering and R&D services

18.6

1.9

5.9

Source: Company, Angel Research

Industry segment wise, the company’s Financial Services vertical (contributed

25.9% to revenue) posted a 1.3% QoQ de-growth in CC terms. The Manufacturing

vertical (contributed 31.5% to revenue) posted a 0.9% QoQ growth in CC terms.

Public services; Life sciences & Healthcare; and Telecommunication, Media,

Publishing & Entertainment reported a QoQ growth of 7.1%, 6.4%, and 4.2%, all

in CC terms, respectively. Retail & CPG (contributed 9.5% of the revenue) on the

other hand reported de-growth of 1.2% QoQ in revenue in CC terms, during the

quarter.

May 17, 2016

HCL Technologies | 3QFY2016 Result Update

Exhibit 5: Revenue growth trend (Industry wise)

% of revenue

% growth (CC qoq)

% growth (yoy)

Financial services

25.9

(1.3)

4.6

Manufacturing

31.5

0.9

1.1

Life sciences & Healthcare

12.2

6.4

22.6

Public Services

10.6

7.1

16.5

Retail & CPG

9.5

(1.2)

18.5

Telecom, MPE

9.7

4.2

19.2

Source: Company, Angel Research

Among geographies, in CC terms, Americas grew by 3.7%, Europe de-grew by

2.4%, while RoW grew by 1.3% on a sequential basis.

Exhibit 6: Revenue growth trend (Geography wise in CC terms)

10.6

5.6

5.5

4.4

5.1

3.7

0.7

0.1

(0.0)

1.3)

0.2

(3.4)

(3)

(2.4)

(6)

(9)

(8.4)

(12)

3QFY15

4QFY15

1QFY2016

2QFY2016

3QFY16

Europe

Rest of the world

Source: Company, Angel Research

Hiring and utilization

During the quarter, the overall headcount of HCL Tech increased by 9,280 to

1,04,896 employees. The attrition rate in IT Services inched up to 17.3% V/s

16.7% in 2QFY2016. The blended utilization level of the company inched up to

85.6% V/s 84.7% in 2QFY2016.

Exhibit 7: Hiring trend

Particulars

3QFY15 4QFY15 1QFY16 2QFY16 3QFY16

Technical

95,190

97,135

96,541

94,652

95,649

Support

8,994

8,972

9,030

9,044

9,247

Total employee base

1,04,184

1,06,107

105,571

103,696

104,896

Gross addition

11,041

9,448

7,889

6,234

9,280

Net addition

3,944

1,923

(1559)

(1875)

1200

Attrition - IT services (LTM) - %

16.2

16.5

16.3

16.7

17.3

Source: Company, Angel Research

May 17, 2016

HCL Technologies | 3QFY2016 Result Update

Operating margin in line of expectation

On the operating front, the EBITDA margin came in at 22.2%, an uptick of 71bp

QoQ. The Adj. EBIT margin came in at 20.8% V/s 20.0% in 2QFY2016, an

expansion of 73bp QoQ. Business continuity costs in Chennai were headwinds in

addition to partial wage hikes; these were however offset by depreciation of the

INR and sequential decline in the headcount.

Exhibit 8: Margin profile

35.3

34.9

34.2

34.4

34.6

22.5

22.2

21.5

20.9

21.3

20.2

20.8

19.6

20.0

3QFY15

4QFY15

1QFY16

2QFY16

3QFY16

Gross margin

EBITDA margin

EBIT margin

Source: Company, Angel Research

Client pyramid

HCL Tech signed 7 transformational deals during the quarter with TCV of more

than US$2bn, taking the number of transformational engagements during the nine

month financial year to 25 with TCV of more than US$4bn. These wins were

broad-based across service lines and industry verticals, led by the company’s next-

generation offerings - BEYONDigital, IoT WoRKS and Next-Gen ITO.

Exhibit 9: Client pyramid

Particulars

3QFY15

4QFY15

1QFY16

2QFY16

3QFY16

US$1mn-5mn

262

265

262

267

262

US$5mn-10mn

US$10mn-20mn

US$20mn-30mn

US$30mn-40mn

US$40mn-50mn

US$50mn-100mn

US$100mn plus

Source: Company, Angel Research

May 17, 2016

HCL Technologies | 3QFY2016 Result Update

Investment arguments

Robust outlook: The company’s engineering services has been seeing lumpy

growth over the last few quarters. This is however largely a function of the timing

of large transformational deals. 6-8 of the large deals signed a few quarters ago

will aid the company to continue to post industry leading growth, although the

same is unlikely to be consistent on a sequential basis. Other service areas like

application support & maintenance have been seeing slow growth. Although the

area is well-penetrated, there is potential for churn, and there could likely be entry

of new customers. We expect HCL Tech to post a USD and INR revenue CAGR of

12.5% and 15.5%, respectively, over FY2015-18E (inclusive of the acquisition of

Geometric Software and Volvo deals).

Healthy pipeline: HCL Tech signed 7 transformational deals during the quarter

with TCV of more than US$2bn, taking the number of transformational

engagements during the nine month financial year to 25 with TCV of more than

US$4bn. These wins were broad-based across service lines and industry verticals,

led by our Next-generation offerings - BEYONDigital, IoT WoRKS and Next-Gen

ITO.

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

FY2015-18E. At the current market price, the stock is trading at 12.9x FY2017E

and 11.2x FY2018E EPS. We recommend a Buy on the stock with a price target of

`1,038.

Exhibit 10: One-year forward PE (x) chart

1000.0

800.0

600.0

400.0

200.0

0.0

Price

18x

15x

12x

Source: Company, Angel Research

May 17, 2016

HCL Technologies | 3QFY2016 Result Update

Exhibit 11: Recommendation summary

Company

Reco

CMP Tgt Price Upside

FY2017E FY2017E

FY2015-17E

FY2017E

(`)

(%)

EBITDA (%)

P/E (x)

EPS CAGR (%)

EV/Sales (x)

RoE (%)

HCL Tech

Buy

722

1,000

38.5

20.5

12.9

4.2

1.6

20.3

Infosys

Accumulate

1,207

1,374

13.9

27.5

18.5

10.6

3.4

22.4

TCS

Buy

2,523

3,004

19.0

28.3

17.9

11.8

3.6

34.6

Tech Mahindra Accumulate

478

530

10.8

17.0

14.2

8.0

1.3

19.1

Wipro

Buy

540

680

26.0

23.8

13.3

9.7

1.7

20.0

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 and 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.

May 17, 2016

HCL Technologies | 3QFY2016 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

SG&A expenses

4,070

4,563

3,940

6,598

7,661

% of net sales

12.4

12.3

12.8

13.4

EBITDA

8,629

8,700

6,606

10,095

11,719

% of net sales

26.2

23.5

21.5

20.5

Depreciation and amort.

753

451

393

640

740

% of net sales

2.3

1.2

1.3

EBIT

7,876

8,249

6,213

9,454

10,979

% of net sales

23.9

22.3

20.2

19.2

Other income, net

492

912

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

PAT

6,739

7,253

5,605

7,862

9,037

Share from equity invest.

Forex loss

(549)

ESOP charges

103

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

May 17, 2016

HCL Technologies | 3QFY2016 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

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

Deposits with HDFC Ltd.

Fixed deposits with banks

Investment securities HTM

160

Investment in equity investee

Other assets

2,346

3,066

3,879

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

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

39,768

54,939

68,906

Note: FY2016 Numbers are 9 month figures

May 17, 2016

HCL Technologies | 3QFY2016 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)

Pre tax cash from operations

7,946

7,536

5,988

8,455

9,729

Other income/prior period ad

572

912

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)

(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)

814

(Inc)/dec in non current assets

(107)

(214)

(72)

(300)

Cashflow from investing activities

(6,191)

(2,602)

(2,473)

(6,500)

(5,600)

Inc/(dec) in debt

Inc/(dec) in equity/premium

ESOP charges

(25)

(103)

Dividends

(296)

(1,651)

(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

May 17, 2016

HCL Technologies | 3QFY2016 Result Update

Key ratios

Y/E Mar

FY2014

FY2015

FY2016

FY2017E

FY2018E

Valuation ratio (x)

P/E (on FDEPS)

16.4

14.0

18.0

12.9

11.2

P/CEPS

14.6

13.2

16.8

11.9

10.4

P/BVPS

5.1

4.1

3.6

2.6

2.0

Dividend yield (%)

1.9

2.4

EV/Sales

2.8

2.4

2.9

1.6

1.2

EV/EBITDA

10.7

10.4

13.7

7.7

5.6

EV/Total assets

3.0

2.5

2.3

1.4

1.0

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

17.0

Book value

142

175

199

274

358

Dupont analysis

Tax retention ratio (PAT/PBT)

0.8

Cost of debt (PBT/EBIT)

1.1

EBIT margin (EBIT/Sales)

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

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

Note: FY2016 Numbers are 9 month figures

May 17, 2016

HCL Technologies | 3QFY2016 Result Update

Research Team Tel: 022 - 39357800

E-mail: [email protected]

Website: www.angelbroking.com

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ownership of more than 1% in the company covered by Analyst. Angel or its associates/analyst has not received any compensation /

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Disclosure of Interest Statement

HCL Technologies

1. Analyst ownership of the stock

2. Angel and its Group companies ownership of the stock

3. Angel and its Group companies' Directors ownership of the stock

4. Broking relationship with company covered

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors

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)

May 17, 2016