MOSL: HCL Technologies (Neutral)-Guidance dampens expectations from organic momentum

HCL Technologies: Guidance dampens expectations from organic momentum

(HCLT IN, Mkt Cap USD21.7b, CMP INR1041, TP INR1050, 1% Upside, Neutral)

•  Marginal revenue miss: HCLT’s 4QFY18 revenue grew 8.2% YoY CC (est. of +9.1%), EBITDA rose 14.6% YoY (in-line), and PAT increased 10% YoY to INR22.3b (est. of INR23.5b). The company delivered QoQ CC revenue growth of 1.2% versus our estimate of +2%. EBIT margin for the quarter was flat QoQ at 19.6%, in line with our estimate of 19.8%. Full-year FY18 revenue grew 10.5% YoY CC, EBITDA rose 11% YoY and PAT grew 3.8% YoY.
• FY18 revenue growth guidance below expectations: For FY19, HCLT guided for CC revenue growth of 9.5-11.5%. From the mid-point, 5.25pp of contribution would come from inorganic investments (including ~USD200m from C3i solutions), pegging the organic growth guidance at 5.25%, which is disappointing, considering expectations of a revival in IMS and Application Services. Implied CQGR is 2.55-3.3%, but is expected to be lower organically (our estimate is 1.25-2.2%) since C3i is yet to get integrated.
• Implied drag from IMS appears material: HCLT is pivoting to Mode-2 and Mode-3 services, which contributed 23.4% to FY18 revenues, growing at 41% YoY (including inorganic investments). This is in sync with the rest of the industry, where 20-30% of revenues are being contributed by Digital, which is growing at upwards of 30%. HCLT’s guidance would imply acute pressure in the remaining ~77%, where the base of large legacy IMS deals will drag overall growth.