HCL Technologies - Stellar Show in Seasonally Weak Quarter ::Edelweiss

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HCL Technologies’ (HCLT) reported stellar Q2FY15 revenues of USD1,491mn, up 4.0% QoQ (6.2% in constant currency (cc) terms), way ahead of Street’s estimate of 1.0% growth. EBITDA margin at 25.0%, flat sequentially, too beat Street’s estimate of 24.4%. HCLT has recommended issue of bonus shares in 1:1 ratio. Growth was broadbased across geographies, verticals and services during the quarter. Core software (CS) reported 4.4% QoQ growth, while IMS grew 3.6% (6.2% in cc). Commentary on demand environment remained positive (similar to peers) riding healthy deal pipeline, recovery in US and increasing traction in digital spend. We maintain our FY15/FY16 USD revenue estimate of 12.7%/15.0% and have 13.5% forecast for FY17. However, revision of USD/INR estimate to INR62 from INR59 for FY16 leads to 5.7% upward revision in our FY16 EPS estimates.

Broadbased growth; core software gains momentum

HCLT’s 4.0% QoQ growth was led by US (6.0% growth), while Europe grew 2.0%. CS grew 4.4% QoQ (2.1-2.3% range in past four quarters), while IMS grew 3.6%. As the deal won earlier ramp up we expect growth in CS to continue given higher component of CS in these deals. Life sciences & healthcare (LSHC), manufacturing and retail & CPG grew 17.9%, 5.9% and 5.6%, respectively.

Ramp up of deals to aid margin sustenance

On deal wins, HCLT turned in a stupendous show with USD2bn plus deal wins in H1FY15 on the back of USD5bn plus in FY14. We believe ramp up of these deals will negate the impact of wage hikes and investments in S&M, tools and automation and developing capabilities, particularly in engineering and R&D and digital technologies in FY16. We have built in ~25.0%/ 24.5% EBITDA margin for FY16/FY17.

LINK
https://www.edelweiss.in/research/HCL-Technologies--Stellar-Show-in-Seasonally-Weak-Quarter;-Result-Update-Q2FY15/28184.html