1QFY2017 Result Update | IT

August 8, 2016

HCL Technologies

BUY

CMP

`822

Performance Highlights

Target Price

`1,000

(` cr) - Consl.

1QFY17 3QFY16

% chg (qoq) 1QFY16

% chg (yoy)

Investment Period

12 Months

Net revenue

11,336

10,698

6.0

9,267

22.3

EBIT

2,333

2,222

5.0

1,978

17.9

Stock Info

Adj. EBITDA margin (%)

20.6

(19)bp

21.3

(76)bp

Sector

PAT

2,047

1,925

6.3

1,683

21.6

Market Cap (` cr)

115,908

Source: Company, Angel Research

Net Debt (` cr)

(101,878)

For 1QFY2017, HCL Technologies (HCL Tech) posted better-than-expected

Beta

0.6

numbers on all fronts. In US$ terms, revenue came in at US$1,691mn V/s

52 Week High / Low

997/707

US$1,674mn expected and V/s US$1,587mn in 3QFY2016, ie a growth of 6.5%

Avg. Daily Volume

202,406

qoq (6.0% qoq in constant currency [CC] terms). On the operating front, the EBIT

Face Value (`)

margin came in at 20.6% V/s 19.4% expected and V/s 20.8% in 3QFY2016, ie a

BSE Sensex

28,078

qoq dip of 19bp. Thus, the adj. net profit came in at `2,047cr V/s `1,925cr in

Nifty

8,683

3QFY2016, a qoq growth of 6.3%. For FY2017, the company gave a revenue

Reuters Code

HCLT.BO

growth guidance of 12.0-14.0% in CC terms which translates into an 11.2% to

Bloomberg Code

HCLT@IN

13.2% growth in US$ terms. The operating margin (EBIT) for FY’2017 is expected

to be in the range of 19.5% to 20.5%. We maintain our Buy rating on the stock.

Quarterly highlights: For 1QFY2017, the company posted better-than-expected

Shareholding Pattern (%)

numbers on all fronts. In US$ terms, revenue came in at US$1,691mn V/s

Promoters

60.4

US$1,674mn expected and V/s US$1,587mn in 3QFY2016, ie a growth of 6.5%

MF / Banks / Indian Fls

10.0

qoq (6.0% qoq in CC terms). The growth was driven by Europe which posted a

FII / NRIs / OCBs

26.2

16.9% CC qoq growth; USA posted a 2.0% qoq growth and ROW posted a flat

Indian Public / Others

3.4

growth. In terms of industries, Manufacturing grew 12.0% qoq CC, Public Services

posted an 11.8% qoq CC growth and Retail & CPG posted a 14.5% qoq CC

growth. On the operating front, the EBIT margin came in at 20.6% V/s 19.4%

Abs.(%)

3m 1yr

3yr

expected and V/s 20.8% in 3QFY2016, ie a qoq dip of 19bp. Thus, the adj. net

Sensex

11.3

(0.4)

46.5

profit came in at `2,047cr V/s `1,925cr in 3QFY2016, a qoq growth of 6.3%

HCL Tech

41.9

52.0

559.1

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

CAGR of 16.0% and 18.0, respectively, over FY2016-18E. On back of strong order

3-year price chart

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

1,200.0

1,000.0

Key financials (Consolidated, US GAAP)

800.0

Y/E March (` cr)

FY2015

FY2016

FY2017E

FY2018E

600.0

Net sales

37,061

30,781

49,242

57,168

400.0

% chg

12.6

(16.9)

60.0

16.1

200.0

Net profit

7,253

5,643

7,862

9,037

0.0

% chg

17.2

(22.2)

39.3

14.9

EBITDA margin (%)

23.5

21.5

20.5

EPS (`)

51.4

40.0

55.7

64.1

Source: Company, Angel Research

P/E (x)

16.0

20.5

14.7

12.8

P/BV (x)

4.7

4.1

3.0

2.3

RoE (%)

29.3

20.1

20.3

17.9

RoCE (%)

23.1

15.6

17.2

15.9

Sarabjit kour Nangra

EV/Sales (x)

2.8

3.4

1.9

1.4

+91 22 3935 7800 Ext: 6806

EV/EBITDA (x)

12.0

15.8

9.1

6.8

[email protected]

Source: Company, Angel Research; Note: CMP as of August 5, 2016

Please refer to important disclosures at the end of this report

HCL Technologies | 1QFY2017 Result Update

Exhibit 1: 1QFY2017 performance (Consolidated, US GAAP)

Y/E March (` cr)

1QFY17

3QFY16

% chg (qoq)

1QFY16

% chg (yoy)

FY16

FY15

% chg(yoy)

Net revenue

11,336

10,698

6.0

9,267

22.3

40,913

35,708

14.6

Cost of revenue

7,440

6,961

6.9

5,997

24.1

26,901

22,583

19.1

Gross profit

3,896

3,737

4.3

3,270

19.1

14,012

13,125

6.8

SG&A expense

1,375

1,358

1.3

1,179

16.6

5,217

4,308

21.1

EBITDA

2,521

2,378

6.0

2,091

20.6

8,795

8,817

(0.2)

Dep. and amortization

188

157

19.7

113

66.4

569

504

12.9

EBIT

2,333

2,222

5.0

1,978

17.9

8,226

8,313

(1.0)

Other income

253

200

26.5

179

41.3

1,009

856

PBT

2,586

2,422

6.8

2,157

19.9

9,235

9,169

0.7

Income tax

543

497

9.3

473

14.8

1,883

1,864

1.0

PAT

2,047

1,925

6.3

1,683

21.6

7,352

7,305

0.6

Forex gain/(loss)

Adjusted PAT

2,047

1,925

6.3

1,683

21.6

7,352

7,305

0.6

EPS

14.5

13.6

6.3

11.9

21.6

52.3

52.0

0.6

Gross margin (%)

34.4

34.9

(56)bp

35.3

(92)bp

34.2

36.8

(251)bp

EBITDA margin (%)

22.2

1bp

22.6

(33)bp

21.5

24.7

(320)bp

EBIT margin (%)

20.6

20.8

(19)bp

21.3

(76)bp

20.1

23.3

(317)bp

PAT margin (%)

18.1

18.0

6bp

18.2

(10)bp

18.0

20.5

(249)bp

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

Exhibit 2: 1QFY2017 - Actual Vs Angel estimates

(` cr)

Actual

Estimate

Variation (%)

Net revenue

11,336

11,219

1.0

EBIT margin (%)

20.6

19.4

120bp

PAT

2,047

1,891

8.2

Source: Company, Angel Research

Sales higher than expected

For 1QFY2017, the company posted better than expected numbers on all fronts. It

posted sales of

`11,336cr V/s

`11,219cr expected and V/s

`10,698cr in

3QFY2016 (the company has migrated to financial year reporting, ie to March-

end), ie a qoq growth of 6.0%. In US$ terms, sales came in at US$1,691mn V/s

US$1,674mn expected and V/s US$1,587mn in 3QFY2016, a qoq growth of

6.5% (6.0% qoq in CC terms).

The growth was driven by Europe which posted a 16.9% CC qoq growth; USA

posted a 2.0% qoq growth and RoW posted a flat growth. In terms of industries,

Manufacturing grew 12.0% qoq CC, Public Services posted a 11.8% qoq CC

growth and Retail & CPG posted a 14.5% qoq CC growth.

The company signed 13 transformational deals during the quarter across service

lines and industry verticals. The broad-based business wins were driven by

next-generation integrated offerings

- Next-Gen ITO, BEYONDigital and

IoT WoRKS, reflecting investments in Internet of Things, digital technologies, cloud,

automation and artificial intelligence.

August 8, 2016

HCL Technologies | 1QFY2017 Result Update

Exhibit 3: Revenue growth trend

1,700

6.6

1,600

1,500

1,400

1,300

3.1

1,200

1.4

1.3

1,100

1,538

1,545

0.5

1,566

1,587

1,691

1,000

4QFY15

1QFY2016

2QFY2016

3QFY16

1QFY2017

Revenue (USD)

qoq growth (%)

Source: Company, Angel Research

In terms of services, the Engineering & R&D services (which constituted 17.7% of

sales) posted a growth 0.7% qoq (CC), while Application services (accounting for

38.3% of sales) grew by 1.9% qoq CC. Infrastructure services, another important

segment of the company, which contributes by around 39.8% to overall sales,

posted a growth of 16.5% qoq. Business services, which constituted 4.1% of sales,

de-grew by 15.9% qoq CC.

Exhibit 4: Revenue growth trend (Service wise)

% of revenue

% growth CC (qoq)

% growth (yoy)

Application services

38.3

1.9

4.3

Infrastructure services

39.8

16.5

25.8

Business services

4.1

(15.9)

(11.5)

Engineering and R&D services

17.7

0.7

4.8

Source: Company, Angel Research

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

23.0% to revenue) posted a 0.1% qoq de-growth in CC terms. The Manufacturing

vertical (contributed 33.2% to revenue) posted a 12.0% qoq growth in CC terms.

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

Publishing & Entertainment reported a QoQ growth of 11.8%, (1.0)%, and (2.8)%,

all in CC terms, respectively. Retail & CPG (contributed 10.0% of the revenue) on

the other hand reported a growth of 14.5% qoq CC terms, during the quarter.

August 8, 2016

HCL Technologies | 1QFY2017 Result Update

Exhibit 5: Revenue growth trend (Industry wise)

% of revenue

% growth (CC qoq)

% growth (yoy)

Financial services

23.6

(0.1)

5.7

Manufacturing

33.2

12.0

7.7

Life sciences & Healthcare

11.9

(1.0)

21.5

Public Services

11.7

11.8

24.7

Retail & CPG

10.0

14.5

14.9

Telecom, MPE

9.1

(2.8)

17.8

Source: Company, Angel Research

Among geographies, in CC terms, Americas grew by 2.0%, Europe grew by

16.9%, while RoW was flat on a sequential basis.

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

16.9

5.6

5.5

5.1

3.7

0.1

1.3

2.0

0.7

(0.0)

(2.4)

(3)

(2.4)

(6)

(3.4)

(9)

(8.4)

(12)

4QFY15

1QFY2016

2QFY2016

3QFY16

1QFY2017

Europe

Rest of the world

Source: Company, Angel Research

Hiring and utilization

During the quarter, the overall headcount of HCL Tech increased by10,515 to

1,07,968 employees. The attrition rate in IT Services inched up to 17.8% V/s

17.3% in 3QFY2016. The blended utilization level of the company inched up to

85.8% V/s 85.6% in 3QFY2016.

Exhibit 7: Hiring trend

Particulars

4QFY15 1QFY16 2QFY16 3QFY16 1QFY17

Technical

97,135

96,541

94,652

95,649

98,225

Support

8,972

9,030

9,044

9,247

9,743

Total employee base

1,06,107

105,571

103,696

104,896

107,968

Gross addition

9,448

7,889

6,234

9,280

10,515

Net addition

1,923

(1559)

(1875)

1200

3,072

Attrition - IT services (LTM) - %

16.5

16.3

16.7

17.3

17.8

Source: Company, Angel Research

August 8, 2016

HCL Technologies | 1QFY2017 Result Update

Operating margin higher than expectation

On the operating front, the EBIT margin came in at 20.6% V/s 19.4% expected

and V/s 20.8% in 3QFY2016, qoq dip of 19bp. Margins beat our estimates on

back of higher than expected volume growth.

Exhibit 8: Margin profile

34.2

34.4

34.6

34.9

34.4

22.2

21.5

20.9

21.5

20.0

20.8

20.6

20.2

19.6

4QFY15

1QFY16

2QFY16

3QFY16

1QFY17

Gross margin

EBITDA margin

EBIT margin

Source: Company, Angel Research

Client pyramid

HCL Tech signed 13 transformational deals during the quarter across service lines

and industry verticals. The broad-based business wins were driven by next-

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

reflecting investments in Internet of Things, digital technologies, cloud, automation

and artificial intelligence.

Exhibit 9: Client pyramid

Particulars

4QFY15

1QFY16

2QFY16

3QFY16

1QFY17

US$1mn-5mn

265

262

267

262

245

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

August 8, 2016

HCL Technologies | 1QFY2017 Result Update

Investment arguments

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

growth over the last few quarters. However, on back of the deals on hand, the

company gave a revenue growth guidance of 12-14% in CC for FY2017. The

revenue guidance is based on FY2016 (April to March 2016) average exchange

rates. The above constant currency guidance translates to 11.2-13.2% in US$

terms based on June 30 2016 exchange rates. The operating margin (EBIT) for

FY’2017 is expected to be in the range of 19.5% to 20.5%.

We expect HCL Tech to post a USD and INR revenue CAGR of 16.3% and 18.0%,

respectively, over FY2016-18E (inclusive of the acquisition of Geometric Software

and Volvo deals).

Healthy pipeline: HCL Tech signed 13 transformational deals during the quarter

across service lines and industry verticals. The broad-based business wins were

driven by next-generation integrated offerings - Next-Gen ITO, BEYONDigital and

IoT WoRKS, reflecting investments in Internet of Things, digital technologies, cloud,

automation and artificial intelligence.

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

FY2016-18E. At the current market price, the stock is trading at 14.7x FY2017E

and 12.8x FY2018E EPS. We recommend a Buy, with a price target of `1,000.

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

1,200

1,000

800

600

400

200

Price

18x

15x

12x

Source: Company, Angel Research

August 8, 2016

HCL Technologies | 1QFY2017 Result Update

Exhibit 11: Recommendation summary

Company

Reco

CMP Tgt Price Upside

FY2018E FY2018E

FY2016-18E

FY2018E

(`)

(%)

EBITDA (%)

P/E (x)

EPS CAGR (%)

EV/Sales (x)

RoE (%)

HCL Tech

Buy

822

1,000

21.7

20.5

12.8

9.6

1.4

17.9

Infosys

Accumulate

1,067

1,370

28.4

27.5

14.8

10.4

2.6

22.3

TCS

Buy

2,649

3,004

13.4

27.3

17.6

13.0

3.6

35.5

Tech Mahindra Accumulate

495

700

41.4

17.0

12.0

13.2

1.1

20.7

Wipro

Buy

545

680

24.8

17.9

14.8

9.9

2.1

19.6

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 & 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.

August 8, 2016

HCL Technologies | 1QFY2017 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

August 8, 2016

HCL Technologies | 1QFY2017 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

39,767

54,939

68,906

Note: FY2016 Numbers are 9 month figures

August 8, 2016

HCL Technologies | 1QFY2017 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

August 8, 2016

HCL Technologies | 1QFY2017 Result Update

Key ratios

Y/E Mar

FY2014

FY2015

FY2016

FY2017E

FY2018E

Valuation ratio (x)

P/E (on FDEPS)

18.7

16.0

20.5

14.7

12.8

P/CEPS

16.7

15.1

19.2

13.6

11.9

P/BVPS

5.8

4.7

4.1

3.0

2.3

Dividend yield (%)

1.7

2.1

EV/Sales

3.2

2.8

3.4

1.9

1.4

EV/EBITDA

12.3

12.0

15.8

9.1

6.8

EV/Total assets

3.5

2.9

2.6

1.7

1.2

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

August 8, 2016

HCL Technologies | 1QFY2017 Result Update

Research Team Tel: 022 - 39357800

E-mail: [email protected]

Website: www.angelbroking.com

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Disclosure of Interest Statement

HCL Technologies

1. Financial interest of research analyst or Angel or his Associate or his relative

2. Ownership of 1% or more of the stock by research analyst or Angel or associates or relatives

3. Served as an officer, director or employee of the company covered under Research

4. Broking relationship with company covered under Research

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)

August 8, 2016