HCL Technologies Focus list stock Revenue momentum and margin improvement continues ::Credit Suisse

● The revenue momentum continues…: HCLT reported another
strong quarter of 3.1% USD (3.9% cc), once again driven by
infrastructure management services (+9% QoQ). Software
services have been muted for a year now but may pick up with
some uptick in discretionary spending. Full report.
● … and so does margin improvement: EBIT margins were up 140
bp QoQ driven by the INR depreciation and some operational
improvements. Margins for FY13 were up 380 bp YoY and
management expects stability in margins going ahead.
● Based on these results, we are revising up our FY14/FY15
estimates again by 5%/6% and our target price from Rs950 to
Rs1,100 (24-month forward P/E of 15x).
● Some upward earnings revisions and multiple re-rating can be stock
price drivers: While the stock is up 25%+ over the past three
months and 80%+ over the past year, we believe there is possibility
of some more earnings upgrades. Additionally, with such consistent
performance and the recent INR weakness, there is a case for
some multiple expansion. HCLT is a CS NJA Focus List stock.

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The revenue momentum continues …
The company continues to win deals at a good pace – this was the
third consecutive quarter in which it won multi-year deals with a total
contract value in excess of US$1 bn. This includes 12 multi-year deals
from F500/G2000 clients. Revenue grew 3.1% QoQ to $1,228 mn, inline with our estimates, driven by the infrastructure services segment.
Growth was 3.9% QoQ in constant currency terms. Excluding the
impact of the sale of its Capital Stream business in the March quarter,
revenue rose 4.3% in constant currency terms in this quarter.
In the software services segment, revenue growth was lower at 1%
QoQ – similar to the previous quarter. This business has grown just
5% in FY13 (US$ terms) – areas such as traditional ERP
implementation and application services have been weak. This is a
source of concern although given a likely pick-up in demand in this
segment, some pick-up in discretionary spending and recent deal wins,
growth in this segment may pick up somewhat.
… and so does margin improvement
EBIT margins (after impact of option costs) were up 140 bp QoQ at
20.8% – 140 bp ahead of expectations. Gross margins climbed 110
bp. Management continues to feel comfortable with a margin level of
18.5% to 19% at an exchange rate of INR55/USD. Some gains on
account of the INR depreciation may flow through while some may be
reinvested. Along with higher EBIT, higher other income and lower tax
rates helped PAT (after impact of option costs) which beat our
estimates by about 15%.
Unbilled revenue decreased to 22 days from 27 days in the previous
quarter (unbilled revenue divided by LTM revenue). Billed DSO has
gone up to 55 from 53 days.
Headcount grew in 4Q but growth has been muted
Total headcount grew by about 1,100 QoQ, after two quarters of decline
(up 1% YoY). Blended utilisation for software services was up 20 bp
QoQ to 84%. HCLT continues to operate at a high utilisation level which
we believe can be a constraint if the demand environment picks up
significantly. Management seems comfortable though with its ability to
manage any revenue uptick – deployment is quicker now and there will
be hiring in different countries. Attrition in software and infrastructure
management (voluntary, LTM) was up 70 bp QoQ at 14.9%.
Others
The company has declared a final quarterly dividend of Rs6/share. This
takes the full year dividend to Rs12/share – same as FY6/12 (which
included a Rs2 special dividend). FY6/13 dividend payout ratio was 25%.
Ms Roshni Nadar Malhotra, the founder's daughter, has joined the
board of HCL Tech. She has been the CEO of HCL Corp, the
investment holding company, and has been involved with the Shiv
Nadar Foundation. She joins in a non-executive capacity.