Analyst Research Report Snapshot


HCL Technologies Ltd- Q4FY14 Result Update - "ACCUMULATE"




Kisan Ratilal Choksey Shares and Securities Private Limited


04 Aug 2014





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HCL Technologies Ltd- Q4FY14 Result Update CMP: Rs 1515 Target price: Rs 1737 Recommendation: ACCUMULATE “Strong deal signing activity will support above industry growth rate in FY15E” Revenue marginally lower than estimates; however positive surprise continues at EBITDA margin front • IT Services revenue grew by 3.4% QoQ in USD terms as compared to our expectation of 3.7% QoQ growth in Q4 FY14. On positive note revenue growth was across service-lines and share of Infrastructure Services in incremental revenue was only 37% (as compared to its share in revenue of 35%) in Q4 FY14. The management is confident that traction in Engineering Services and Application Services will increase, going forward, supported by recent deal signing and improvement in demand environment • EBITDA margin declined by 38 bps QoQ basis to 26.3% in Q4 FY14 against our expectation of 26% in Q4 FY14. Impact of INR appreciation against the major global currencies and visa cost in Q4 FY14 was partially mitigated by improvement in blended utilization rate by 30 bps QoQ to 84.5% and SG&A cost rationalization on QoQ basis. Company targeting higher growth rate in FY15E on back of strong deal signing activity in FY14 The company signed large deals worth $5 bn in FY14. Moreover, the management anticipates that total contract value of deals coming up for rebid in CY14 will increase by ~10% YoY to $58 bn; hence they expect deals signing activity for the company to improve in FY15E as compared to FY14. Considering robust deal signing activity in FY14 and improved demand environment, the management believes revenue growth will be higher in FY15E than FY14 (i.e. 14% YoY in USD terms). Clarity on reasons for decline in SG&A expenses builds more confidence about sustainability of above industry growth rate As per the management, Selling and Marketing expenses has increased by 22% YoY (in USD terms); whereas there has been decline in other expenses as a result SG&A expenses has been flat in absolute terms on YoY basis in Q4 FY14. The detail of break up in SG&A expenses is as follows- provision for doubtful debts came down from 0.6% of revenue in FY13 to 0.3% in FY14; reduction in ESOP charges to 0.1% of revenue in FY14 from 0.3% in FY13 and INR depreciation against the major global currencies has led to decline in SG&A expenses by 0.5% in FY14. The company believes there is still scope for decline in G&A expenses in FY15E through consolidation of 10,000 seats as compared to 8,000 seats in FY14. Valuation and view We believe the company is trading at significant discount to peer sets (for instance it is trading at valuation discount of ~30% to TCS forward P/E) considering the fact that it will continue to clock higher than industry growth rate in FY15E. Taking the same into account, we recommend “ACCUMULATE” on the stock with a price target of Rs. 1,737 by assigning multiple of 16 times (20% discount to TCS’s target P/E multiple) to its FY16E EPS of Rs 108.5.

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