{LONGTERMINVESTORS} Earnings Update - HCL Technologies (HCL IN) - Healthy revenue growth; guidance encouraging

 

Healthy revenue growth; guidance encouraging

·         In 2QFY17, HCL reported healthy CC growth, which is second best amongst tier-I peer (Infosys: +3.9% QoQ). Revenue in CC grew by 2.8% QoQ & 10.6% YoY. Consolidated revenues grew by 1.6% QoQ to INR 115,190mn. In dollar terms, revenue grew by 1.9% QoQ to USD 1,722mn.   

·         EBIT margin declined by 50 bps QoQ to 20.1%. Margin declined on account of partial wage hike. Management indicated wage hike would impact EBIT margins by 70 bps in 3QFY17 and 10 bps in 4QFY17. Management expects EBIT margin will remain in the range of 19.5 to 20.5% for FY17. APAT stood at INR 20,140mn (-1.6% QoQ & +16.7% YoY).

·         In constant currency, amongst geographies, America led the growth (+5.5% QoQ), while Europe declined (- 2.1% QoQ). European revenues declined mainly due to one-time project closure during the quarter and on account of high growth in 1QFY17 (~17% QoQ growth). Amongst service line, Infrastructure led the growth with 4.4% QoQ, engineering and R&D services (+2.3% QoQ) and business services recovered with 2.1% QoQ growth. Amongst verticals, growth was driven by life sciences & healthcare (+8.2% QoQ) followed by retail & CPG (+7.7% QoQ), telecom (+6.1% QoQ) and financial services (+5.6% QoQ), while manufacturing (-0.9% QoQ) and public services (-3.7% QoQ) declined. 

Valuation: At CMP, the stock trades at P/E of 14.1x/11.2x on FY17E/FY18E EPS. We maintain a BUY rating on the stock with target price of INR 1,017 assigning a P/E of 16.0X on FY18E consensus estimates. Risks: Visa uncertainty, lower discretionary spending, pricing pressure and currency headwinds are key risks.

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Regards,

CSEC Research

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