HCL Tech | Q3FY20 Result Update | Better than expected performance on most fronts

17 Jan
IT

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%  

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