HCL Technologies' Q3FY19 results (Neutral) - Steady Revenue Performance
Q3FY19 result highlights
- Revenues tad better estimates: US$ revenues at 2201m, up 4.9% qoq (IDFCe: US$2158m). CC revenues grew 5.6% qoq & 22.6% yoy was tad above our estimates (IDFCe: 3.4% qoq). Organic revenue growth was around ~4.5% qoq cc. EBIT at Rs30.8bn slightly below our estimates of (IDFCe:Rs31.0bn) as EBIT margins came slightly below our estimates at 19.7%(IDFCe: 20.0%). Mode 2 (17% of revs) grew by 13.1% CC QoQ & EBIT margins increased by 150bps QoQ to 12.3% .PAT was at Rs26.1 bn up 2.8% qoq vs. IDFCe of Rs26.3 bn.
- Strong growth across Verticals & Serivce lines: Revenue growth picked up in IMS this quarter at 9.3% sequentially & 13% yoy. Management confidence of a strong 2H is getting reflected in numbers specifically in IMS segment. Retail showed a strong performance this quarter growing at 7% sequentially in dollar terms,manufacturing grew by 3.1% in dollar terms & financial services was flat at -1.5% qoq sequentially.
- CC guidance retained: HCLT has guided for CC revenue growth of 9.5%-11.5% in FY19 – unchanged. Inspite of strong revenue performance in Q3FY19, revenue guidance is neither increased nor narrowed the band. EBIT margin guidance is retained inspite of weak INR.
- Strong performance in Mode 2: Revenue grew by 12.2% qoq in Mode 2 & strong margin expansion of 150bps sequentially. Mode 2 crosses US$ 1.5 bn run rate. In Mode 1 & Mode 3, revenue grew by 3.2% qoq & 4.8% qoq respectively. In Mode 3, though margins are getting reduced since last 3 quarters and now stands at 23% (-140bps QoQ).
Key positives: IMS back to growth
Key negatives: Mode 3 margins
Impact on financials: EPS unchanged for FY19E/FY20E/FY21E.
Valuations & view
Our cautious stance on HCLT has been premised on cannibalisation of traditional business and acquisition heavy model of growth. While P&L performance continues to hold up well, we see weakness in cash flow performance and subdued organic revenue growth We maintain our Dec 2019 target price of Rs1075 with a Neutral rating.
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