MOSL: Morning India (24/December/19): 1. India Politics (Jharkhand state elections: BJP loses one more state); 2. HCL Tech | ART (Rising capital intensity impacts return ratios)
MOrning India (24/December/19): 1. India Politics (Jharkhand state elections: BJP loses one more state); 2. HCL Tech | ART (Rising capital intensity impacts return ratios)
Today’s top research idea
HCL Technologies: Rising capital intensity impacts return ratios
- HCL's FY19 annual report highlighted a continued focus on inorganic growth to expand the product portfolio. This resulted in higher capital intensity and thus a reduction in the return ratios (RoCE down 750bp to 24.8% over FY15-19).
- Around 54% of operating cash flow (INR356.6b) over FY15-19 was utilized for capex (INR118.7b; mainly for acquisitions of IPRs) and business takeovers (INR72.5b), leading to high intangibles (INR85.3b, 20.6% of NW) and goodwill (INR90.6b, 21.9% of NW).
- HCL's estimate of useful life for amortization of IPRs (over 5-15 years) was higher than peers TCS (2-5 years) and IBM (over 1-5/7 years). While EBIDTA was up 23.8% to INR139.3b in FY19, its conversion to cash flows declined to 83% (FY18: 95%) as the cash conversion cycle elongated from 64 days in FY18 to 68 days in FY19.
- This was primarily due to a decline in advance from customers to 1 day (FY18: 5 days). A comparison of HCL with peers suggests that it has generated a higher RoE (26.0%) than Infosys (23.7%) and Wipro (17.2%) but lower than TCS (36.0%).
Piping hot news
Jharkhand jolt after Maharashtra muddle for BJP
The alliance between Jharkhand Mukti Morcha (JMM) and Congress trumped the incumbent Bharatiya Janata Party (BJP) in Jharkhand in results announced on Monday to the year’s last assembly election. BJP’s defeat was compounded by the loss suffered by chief minister Raghubar Das in Jamshedpur East to rebel Saryu Roy, who quit the party recently because of differences over its functioning.
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