HCL Tech | Q3FY20 Result Update | Better than expected performance on most fronts
Hits:
i. HCL Tech delivered an impressive Constant Currency revenue growth of 16.4% on a YoY basis which is the sixth consecutive quarter of double digit growth.
ii. On a sequential basis revenue growth was 2.1% which was slightly ahead of the consensus expectations of 2%.
iii. Product & Platform’s share in the total revenue now stands at 15.8% up from 14.7% in Q2FY20, led by the acquisition of IBM’s product’s vertical. The business grew by 52.3% on a YoY basis.
iv. On the vertical front: Manufacturing, Financial services, Retail, Telecom all reported a high teen growth on a YoY basis. Public services business grew at a staggering 29.8%.
v. The management has raised their FY20E CC revenue growth guidance to (16.5-17)% band from (15-17)% band earlier. This is the 2nd consecutive increase in guidance.
vi. Increase of guidance to (16.5-17)% CC YoY growth from (15-17)%, is led by increased guidance of inorganic growth of 6% from (5-6)% earlier guidance & organic growth of (10.5-11)% from (10-11)% earlier guidance.
vii. EBIT margin came in strong at 20.2% up 20 bps from Q2 FY’20 vs an expectation of 20%. It was led by the increased contribution from software portion of the business with higher EBIT margins contributing 25bps & higher utilization negating the impact of 60bps of salary hike.
viii. Management has raised the EBIT margin to (19-19.5)% from the earlier guidance of (18.5-19.5)%.
ix. Attrition came down sequentially to 16.8% from 16.9% in last quarter and seems to have peaked out at 17.8% in Q3FY19.
x. Client addition was strong at 49 and was the highest in at least last 21 quarters with significant addition in the higher revenue bucket.
Misses:
i. The contribution from the top 5 & top 10 clients have come down because of client specific issues at the top of the pyramid.
ii. Net employee addition at 2,050 is the slowest in last 7 quarters and has been an industry wide phenomenon this quarter.
iii. Digital growth softened in the quarter and grew at 22.8% & currently stands at 18.2% of the total revenue. *The softening of digital growth is seen across the industry.*
Valuation:
At CMP of 600, HCL TECH is trading at 15 times FY’20 & 13.3 times FY’21 EPS.
View:
Overall HCL Tech has reported a robust set of numbers which exceeded the expectations on most fronts and the Management has increased the lower band of revenue growth & EBIT margins. With the mix of higher margin product business increasing in the total revenue mix & the firm reporting an industry leading growth with historic high deal pipeline, we continue to maintain our hypothesis of multiples re-rating in the counter.
| INR Cr | Q3FY20 | Q2FY20 | QoQ | Q3FY19 | YoY |
| Revenues (USD MN) | 2543 | 2486 | 2.3% | 2202 | 15.5% |
| Revenues | 18135 | 17528 | 3.5% | 15699 | 15.5% |
| EBIT | 3670 | 3497 | 4.9% | 3086 | 18.9% |
| – EBIT Margins | 20.2% | 20.0% | 19.7% | ||
| PAT | 3038 | 2651 | 14.6% | 2611 | 16.4% |
| – PAT Margins | 16.8% | 15.1% | 16.6% |