HCL Technologies' Q1FY19 results (Neutral) - Organic performance disappoints
Q1FY19 result highlights
- Revenues below estimates: Revenues at US$ 2055m, up 0.8% qoq (IDFCe: US$2065m). CC revenues grew 2.7% qoq was better than estimates (IDFCe: 2.1% qoq). However inorganic contributed 2% to qoq CC growth, thus a 0.7% qoq CC organic growth is disappointing. EBIT at Rs27.3 bn was ahead than our estimates (IDFCe:Rs26.1bn) as EBIT margins came a bit ahead than estimates at 19.7%. PAT was at Rs24bn(IDFCe of Rs22.3bn) up 7.9% qoq on account of lower tax rate,higher other income & forex gains..
- IP investment strategy to continue: HCL Tech continues to invest cash for IP partnerships. There was an IP investment (US$125mn) in this quarter. Net intangible assets stood at US$1.22bn for the quarter.
- CC guidance retained: HCLT has guided for CC revenue growth of 9.5%-11.5% in FY19 - unchanged. The USD revenue growth guidance is cut by 210bps (factor in cross currency). However weak Q1 organic performance doesn’t inspire much confidence a.
- IMS weak: IMS performance was weak with only 2% YoY CC growth and IMS EBIT margins fell 147bps QoQ. Despite deal wins and commentary we note that broader growth metrics around IMS and key verticals such as BFSI and manufacturing were weak in Q1. Importantly, CFO de-grew as operating cash flow dropped from US$407mn to US$362mn YoY.
Key positives: EBIT margins
Key negatives: Weak organic growth and operating cash flow
Impact on financials: EPS for FY19E/20E +1%/+0.5%.
Valuations & view
Our cautious stance on HCLT has been premised on cannibalisation of IMS, slowing organic growth and need for P&L investments in IP partnership, which together will weigh on growth and margins. We think this is already reflecting in rather weak organic revenue performance. We maintain that stock is not cheap given its amortisation policy. Our estimates are adjusted only marginally and remain below consensus. We maintain our March 2019 target price of Rs925 (set at 13.7x FY20E P/E) with a Neutral rating.
HCL Technologies is a global IT services company working with clients in the areas that impact and redefine the core of their businesses. Co. focuses on 'transformational outsourcing', underlined by innovation and value creation, offering an integrated portfolio of services including software-led IT solutions, remote infrastructure management, engineering and R&D services and Business services. Co. leverages its extensive global offshore infrastructure and network of offices in 31 countries to provide holistic, multi-service delivery in key industry verticals including Financial Services, Manufacturing, Consumer Services, Public Services and Healthcare & Life sciences.
IDFC Securities Ltd., a subsidiary of the Infrastructure Development Finance Company (IDFC) wherein the Government of India holds a 20% interest, is India's leading equities broker catering to most of the prominent financial institutions, both foreign and domestic investing in Indian equities. A research team of experienced and dedicated experts ensures the flow of critically investigated stock ideas and portfolio strategies for our clients. Our coverage spans across various growth sectors such as agriculture, automobiles, Consumer Goods, Technology, Healthcare, Infrastructure, Media, Power, Real Estate, Telecom, Capital Goods, Logistics, Cement amongst other sectors. Our clients value us for our strong research-led investment ideas, superior client servicing track record and exceptional execution skills.
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