HCL Tech: Solid revenue; margin disappointment, but this seems temporary ■ Credit Suisse

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Solid revenue; margin disappointment, but this

seems temporary

■ Solid revenue momentum. HCLT's 4Q FY15 revenue increased 3.2% QoQ

in reported numbers, 2.9% cc, 50 bp above estimates. Infrastructure grew

sharply sequentially, and while LTM growth is coming down from a high

base, it continues to grow at 18% in cc terms. Product engineering was not

very strong in 4Q but LTM growth is accelerating and is now 26%.

Application services growth was modest but LTM numbers are trending up

slowly and are now 7%+. BPO growth remains attractive at around 25%.

Overall, LTM revenue growth has increased to 15% in 4Q from 14.3% in 3Q.

■ Margins disappointed in 4Q, but seem temporary. OPM fell 120 bp QoQ,

and were 140 bp below expectations. Management cited several new wins

and higher costs (such as higher onsite presence, investments in

digitalisation and employee "rebadging" costs) as the reason—it continues to

expect 21-22% OPM on a full-year basis, as new deals ramp up.

■ Small improvement in cash flow after recent weakness. After strong cash

flow in FY14, conversion metrics have somewhat deteriorated. However, there

appears to be some modest uptick—LTM FCF/net income has improved from

60% to 67%, though it is still below 4Q FY14's 95%. Lower profitability and

higher DSOs and deferred costs (from large new project onboardings) have

caused this. There is a QoQ improvement in these metrics and these should

normalise as the projects reach a steady state.

■ HCLT remains our top pick. Most key revenue segments either remain strong

or are picking up, margins are at sustainable levels and relative valuations

remain attractive, despite it being a strong outperformer so far this year.