Blowout!!! • HCL Tech :: ICICI Securities, report

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Blowout!!! • HCL Tech reported a stellar Q2 led by broad based growth • US$ revenues grew 4% QoQ to $1,491 million substantially above our 1% growth and $1,447 million estimate [constant currency (CC), revenues grew 6.2% QoQ]. EBIT margins (23.8%) beat our 22.8% estimate despite a wage hike impact offset by currency tailwinds • Reported PAT of | 1,915 crore was above our | 1,783 crore estimate led by revenue and margin beat • The company announced a dividend of | 8/share for Q2FY15 and a bonus share issue in the ratio of 1:1 A quarter to remember… Application services (42.4% of revenues) rebounded sharply (1.6% QoQ in reported $) vs. flat QoQ in Q1. Overall core software growth (4.4%) saw acceleration vs. uneven (grew 1.8% CQGR in Q1FY13–Q2FY15 and 2%, 2.2%, 2%, 2.5% and 0.9% in Q1FY15, Q4, Q3, Q2 and Q1FY14, respectively) growth in prior quarters. IMS grew 3.7% QoQ likely led by bookings conversion vs. 1.9% in Q1 and average 5.9% reported in Q2FY12-15. HCLT signed deals worth >$1 billion TCV – ninth consecutive quarter – with a significant proportion of them likely in IMS. Note, growth in the previous five quarters was balanced with both IMS and core software contributing ~50% each to incremental revenues vs. FY08-14 when 44% of the incremental revenues were contributed by IMS accompanied by 19 percentage point (pp) increase in contribution. Strong Q2 could moderate quarterly asking rate for FY15E… HCLT’s growth strategy relies broadly based on three pillars of growth that are 1) infrastructure and application management – enterprises of the future including hybrid cloud architecture for infrastructure, ALT+ASM, 2) engineering services – opportunities arising from full services sourcing and that could achieve IMS equalling growth rates, and 3) digital – transformational deals. Despite a strong Q2, we maintain our FY15E dollar revenue growth of 13.5% as HCLT now requires 4% CQGR in the remainder of the year to achieve our estimate, which seems plausible. Bookings steady but conversion rises… HCLT signed new deals worth $1 billion TCV during Q2 taking LTM order booking to $4 billion+ (FY14 total was >$5 billion). Noticeably, this is the ninth consecutive quarter where the company signed deals in excess of $1 billion, and conversion rates seem to have picked up vs. lacklustre in Q1. That said, we maintain our dollar revenue growth estimates given the company’s admission, in Q1, of 1) reduced addressable opportunity ($45 billion vs. $60 billion earlier), 2) rising competitive intensity & 3) moderating win rates from historical highs of 25%. However, change in rupee assumption raises our | EPS estimates upwards. Growth recovery, valuation comfort leads to target price raise… Though HCLT reported 25%, 38% PAT CAGR in FY09-14 with average 18.2% EBIT margins, its current PER represents a modest 20% premium relative to its FY09-14 average (12.5x). Further, HCLT could report revenue, PAT CAGR of 13%, 15% in FY14-16E with average 23.4% margins in FY15-16E led by order book conversion. We believe scope for PE expansion exists as lop-sided (IMS led) growth concerns seem to be alleviating with recovery in core software business. Consequently, we raise our target multiple to 16.7x (15x) and our target price to | 2000 vs. | 1700 earlier.

LINK
 http://content.icicidirect.com/mailimages/IDirect_HCLTech_Q2FY15.pdf