Sharp beat on all fronts HCL Tech :: HDFC Securities

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Sharp beat on all fronts HCL Tech’s 2QFY15 results were way above our estimates on all fronts. Revenue growth of 6.2% in constant currency raced ahead of its peers (Wipro/Infosys/TCS grew by 3.7/2.6/2.5% in cc). Engineering design services appears to be emerging as a new growth engine. Revenues from this service line grew by 9.4% CQGR over the past two quarters and accounted for 18.3% of total revenues. Management guided for strong outlook in Digitalization, Infrastructure Managed Services and Engineering Design Services. Growth appeared more balanced across verticals and geographies in 3QFY15, which is a key positive. Post a strong 2Q beat, we revise our USD revenue growth assumptions upwards to 12.9/13.2% for FY15/FY16E (vs. 11.8/13.1% modeled earlier). We revise our EPS estimates upwards by 5.1/5.3/5.1% for FY15/FY16/FY17E aided by revenue and margin beat. HCL tech currently trades at a 22% discount to TCS. Our TP is revised upwards by 16% to Rs 2,000/sh (16.5x FY16 EPS) aided by EPS and P/E upgrade. Maintain BUY.  2QFY15 highlights : HCL Tech reported revenues of USD 1,491mn, up 4% QoQ which was way above our estimates (USD 1,447mn). Among services, Software services (up 4.4% QoQ), IMS (up 3.7% QoQ) and BPO (up 2% QoQ) drove growth. Growth in constant currency stood at 6.2% QoQ. EBIDTA margin of 25% was down 10bps QoQ, but above our estimates (24.4%). Headwinds from wage hikes for a portion of employees and increasing hiring were negated by tailwinds from strong revenue growth. PAT of Rs 19.15bn beat our estimates by 6.5%, driven by revenue and EBIDTA margin beat. Company has declared a 1:1 bonus issue.  View: While IMS has shown recovery in growth momentum (post two consecutive quarters of modest growth), Engineering Design also appears to be showing an uptick in traction. Unbilled revenues, which had shown a steep increase in 1QFY15, witnessed a moderation in 2Q which is another positive. Company stepped up its dividend per share (Rs 8/sh for 2QFY15 vs. Rs 4/sh paid in 2QFY14). Management guided at signing over 15 transformational deals during the quarter with a TCV of USD1bn. Valuations remain attractive at 13.3x FY17 EPS. Retain BUY with a TP of Rs 2,000/sh.

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