Revival in core software encouraging… • HCL Tech :: ICICI Securities, PDF link

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Revival in core software encouraging…
• HCL Tech reported in line earnings. While dollar revenue growth
(3.4% QoQ to $1,407 million vs. $1,412 million estimate) was in line
with estimates, margins (24.2% vs. 23.5%) were ahead led by SG&A
rationalisation. Constant currency revenues grew 2.8% QoQ
• Reported PAT of | 1,834 crore was above our | 1,600 crore estimate
led by margin beat and higher other income
• The company announced a special dividend of | 12 per share
Infrastructure services continue to drive growth but moderating
Like earlier quarters, Q4 growth (3.4%) was driven by infrastructure
services (IMS, 3.7%). Noticeably, 44% of incremental revenues in FY08-14
were contributed by IMS as its contribution as a percentage of revenues
rose 19 percentage points (pp) during the same period. Core software,
which was sluggish (grew 1% CQGR in Q1FY13–14) continues to see
demand uptick as it grew 3.4%, 2.9%, 2.4% and 0.9% in Q4, Q3, Q2 and
Q1FY14, respectively. However, sequential growth in IMS in Q4 was the
slowest since Q2FY12 and seems to have moderated sharply from the
average 7.8% reported in Q3FY12-FY14. That said, the management
noted that IMS growth could revert to its historical average. Overall,
growth commentary was consistent led by healthy deal signings – TCV
deal signings worth $5 billion in FY14 – coupled with HCLT’s superior win
rate in the rebid market.
Another quarter of healthy bookings…
HCLT signed new deals worth $1 billion TCV during Q4 taking FY14 total
to >$5 billion. Note, this is the seventh consecutive quarter where the
company signed deals in excess of $1 billion. Healthy bookings could
continue in FY15E given the addressable opportunity of $20 billion and
historical win rate of 25% plus.
Business reinvestments, wage hikes may impact margins…
HCLT’s EBIT margins declined a modest 47 bps sequentially to 24.2% and
were ahead of our 23.5% estimate led by SG&A cost rationalisation.
SG&A spends now constitute 11.8% of revenues vs. 20 quarter average of
13.9%. That said, absolute spends generally have increased every
quarter. We expect FY15E margins to decline 110 bps to 23% primarily
led by new deal win transition costs and wage hikes in Q1.
Generally, client metric continues to be healthy
Client metric in Q4 was perplexing. Sequentially, $1-5 million, $5-10
million, $20-30 million, and $40-50 million buckets saw a reduction of
seven, one, two and one clients, respectively. That said, overtime client
metric has been healthy as HCLT added 228 clients to $ 1-5 million bucket
in FY08-14, higher than 130 added during FY03-08 led by a rising win
ratio, focus on IMS deals and improving solution offerings.
Healthy deal pipeline coupled with optimistic commentary merit BUY
HCLT reported another in-line quarter helped by IMS. We continue to
believe a case for re-rating exists as HCLT’s current one-year forward PE
represents a modest 18% premium relative to its five-year (FY09-14)
average (12.5x), despite delivering 38% earnings CAGR (25% revenue
growth and average 18.2% EBIT margins) over the same period, and
expected revenue, earnings CAGR of 13%, 12% over FY14-16E (with
average 22.7% margins in FY15-16E). Consequently, we value HCLT at
15x FY16E and raise our target price to | 1700 vs. | 1600 earlier.

LINK
http://content.icicidirect.com/mailimages/IDirect_HCLTech_Q4FY14.pdf