HCL Tech reported strong Q3FY19 results in terms of revenue and deal pipeline; HCL tech reported revenue growth of 5.6% QoQ and 13% on YoY on constant currency basis.

HCL Technologies Ltd.'s earnings met estimates in the quarter ended December despite facing cross-currency headwinds Sequentially HCL Technologies registered 5.6% rise in consolidated sales to Rs 15699 crore for...

HCL Tech on sales front posted 4.9% sequential growth in USD revenues to US$2,202mn v/s. US$2,099mn in 2QFY2019. In Constant currency terms (CC), the company posted a 5.6% qoq growth. EBIT margin came in at 19.7% v/s 20.0% in 2QFY2019. Consequently, PAT came in at `2,611cr v/s. `2,540cr in 2QFY2019, a rise of 2.8% qoq.

Expect rev/EPS CAGR of 13/10% over FY19-21E factoring USD rev growth at 16.2/10.1% and EBIT% at 20.3/19.7% for FY20/21E, respectively. Valuations attractive at 11.7x FY20E, maintain BUY with TP of Rs 1,260, 14x-Dec-20E EPS. HCL Tech (HCLT) posted robust revenue performance (10-qtr high QoQ) driven by strong uptick in IMS. Revenue came at USD 2,201mn, +5.6/13.0% QoQ/YoY CC, led by IMS (37.5% of rev) posting +10.4% QoQ CC on ramp-up of large deals. Revenue guidance was increased to top-end of 9.5 to 11.5% YoY band (at mid-point earlier) led by traction in organic business. EBIT% stood at 19.7%, -30bps QoQ on wage increase impact. APAT stood at Rs 26.11bn, 2.8/19.0% QoQ/YoY impacted by lower other income (forex loss of Rs 0.54bn), offset by lower ETR.

FY19 guidance revenue growth of 9.5% to 11.5% in CC (7.9% to 9.9% in US$) and EBIT margin of 19.5%-20.5% has been maintained, in-line with our expectation. HCLT now expects FY19 revenue growth at the top-end of the guidance vs. mid-point earlier. We fine-tune our FY19/20E revenue and EPS forecast. We now forecast FY18-20 revenue (US$)/EPS CAGR of 9.9%/11.6%. We maintain ACCUMULATE with new TP of Rs1,099 (vs. Rs1,073 earlier) based on PER of 14x FY20E. Clarity on the ammortisation policy for the acquisition of IBM software products for US$1.8bn remains an important monitorable for us....

HCL Tech (HCLT) reported stellar 10.4% QoQ CC growth in the IMS business, aiding a 4.9% rise in Q3FY19 US$ revenues vs. 2.5% estimated. EBIT margins at 19.7% were a bit softer than estimates. HCLT is trending ahead on organic growth versus its guidance at the start of the fiscal. Robust 9MFY19 new deal bookings (+40% YoY), receding concerns in select European BFSI accounts and likely lower headwinds on IMS contracts support growth visibility....

While at the beginning of FY19 HCL Technologies (HCLT) gave guidance of midpoint of its 9.5%11.5% revenue growth in constant currency (CC) terms with equal contribution from both organic and inorganic means, post 3QFY19 not only is it indicating the upper end of this range but also a higher skew to the organic growth part. HCLT reiterated its target EBIT margin band of 19.5%20.5%. Based on HCLT commentary, a positive surprise on both 2.4% CC 4QFY19 revenue growth factored into its guidance and organic growth is likely. With the commentary around new deal wins (two of the strongest quarters in history in FY19') and YTD bookings (entirely new) up 40% YoY, HCLT seems poised to exit FY19 in a strong fashion. Also, the pain from IMS and the two large European BFSI customers seems to be behind. The commentary around growth seems most positive in HCLT's case among the four tier-1 companies that have declared results for 3QFY19....

ICICI Securities Ltd | Retail Equity Research HCL Tech reported a strong Q3FY19 on the revenue front with constant currency growth of 5.6% QoQ (vs. our estimate of 2.7%)....

of 5.6% ahead of our estimate of 4.5%. Organic QoQ CC growth was 4.3%, higher than our estimate of 3.5%, led by ramp-up in large deals and IP 29 January 2019 segments 3Q seasonality (albeit less pronounced). Despite significant growth, EBIT margin shrank 30bp QoQ to 19.6% (marginally below our estimate of 20%) due to planned wage increases, which had an impact of 50bp, partially offset by 15bp tailwind from currency. PAT of INR26.1b came in 10% ahead of our estimate due to a lower tax rate (17.7% v/s our estimate of 21%), lower forex loss (INR540m v/s our estimate of INR2.6b) and higher other income. For YTD FY19, CC revenue/EBIT/PAT is up by 10.7%/18.6%/15.

Maintain BUY. Our TP is Rs 1,255 at 14x Dec-20E EPS (in-line with 5-yr avg multiple). We recently hosted HCL Techs (HCLT) CFO for investor meetings. The discussions covered organic business and Mode-3 strategy (esp. the recent product acquisition). HCLT has under-performed peers ~30% over the last two years on (1) Organic growth slowdown, with IMS slowing from 9% to 4% YoY, and (2) Balance sheet-heavy capital allocation strategy. HCLTs rev/PAT/OCF share in tier-1 IT has been steady at ~15%.

A Low-cost Call Option On Longevity And Higher Margins Contrary to our lukewarm stance earlier, we are turning structurally more positive on HCL Technologies (HCLT) post announcement of its purchase of seven select IBM IPs for US$1.8 bn on 7 December 2018. We believe this stance may be non-consensus. We also believe the cumulative investment of ~US$3.1bn in acquiring the IPs over the past two-and-a- half years to be the price of a low-cost call option on longevity and higher margins. At ~6x EBITDA (for the cumulative IP), we believe these acquisitions do not have much downside. But it opens up the potential for a large upside in terms of the enterprise software opportunity which has hitherto not been addressed...

HCL Technologies (HCLT) has announced that it has signed definitive agreement to acquire 7 software products from IBM for US$1,775 mn (including earn-out). HCLT would fund this acquisition largely through internal accruals and debt of US$300 mn. The acquisition is expected to be closed in mid-2019. The acquisition would add an incremental revenue of $625mn-$650mn to HCLT's Mode-3 solutions which currently has run-rate of ~US$1bn. HCLT has not clarified the ammortisation policy for this acquisition. we expect the payback to be in 6+ years. We expect the acquisition to add ~3.4%/6.2% to FY20/21 revenue and ~2%/4% to the...

of USD625mn in the first year of acquisition and USD650mn revenues in the second year for acquisition. This implies HCL Tech is valuing the acquired business at P/S of 2.8x. The acquired products have an EBIDTA margin of ~50% and the deal is likely to be cash EPS accretive by ~15%. HCL Tech expects to close the acquisition by mid CY2019 (2QFY20E) and 48% of the purchase consideration is expected to paid on closing date of the acquisition (~2QFY20E). A majority of the remaining payout is expected to be done post...

HCLT announced a landmark deal with IBM for a total consideration of about US$1.8bn that would add incremental revenues of ~US$625mn after completion, with estimated EBIDTA margins of ~50%. The deal could also lead to an EPS accretion of about 5-10%. Following the announcement of the deal, the Street seems to be concerned about HCLT's ability to grow the matured IP assets and management's preference for large inorganic investments to drive future growth. Investors, at the moment, seem to prefer HCLT's peers...

HCLT has moved beyond partnering with IBM to acquiring some of the latter's product IPs, which it believes are a reflection of its focus on the strategic segments and efforts to expand services to a gamut of clients across industries and markets. In this note, we highlight the key specifics of HCLT's announced deal with IBM.

Maintain BUY with TP of Rs 1,260 (15x Sep-20E). HCL Tech (HCLT) posted in-line revenue (IMS recovered) with slightly better operating performance. Guidance/margin unchanged, however outlook (ex-2 BFSI accounts) stronger with improved pipeline, wins and renewal cycle. Revenue came at USD 2,099mn, 3.0/10.5% QoQ/YoY in CC terms. EBIT margin stood at 20%, +29bps QoQ with INR depreciation and productivity gains (automation, utilisation) offset by wage increase and product seasonality impact.

HCL Technologies (HCLT) Q2FY19 result was in-line with our forecast. While revenue growth of 3% QoQ in CC was slightly lower than our forecast of +3.5%, EBIT margin improvement of 30bps QoQ to 20% was in-line. Further, EPS of Rs18.2,+5.6%/+16.2% QoQ/YoY was higher than our forecast aided by higher other income and lower taxes. FY19 guidance revenue growth of 9.5% to 11.5% in CC (8.2% to 10.2% in US$) and EBIT margin of 19.5%-20.5% has been maintained, in-line with our expectation. We factor FX rate of Rs70, vs. Rs68 earlier, for rest of FY19 and FY20. Given the slight miss on revenue growth, we tweak our FY19/20E revenue forecast (in US$) by -0.6%/2.8% and EPS by +3.8%/-2.9%. We now forecast FY18-20 revenue (US$)/EPS CAGR of...

HCL Tech reported good set of Q2FY19 numbers. The company reported healthy revenue growth mainly led by better performance in North America (geographically). Among verticals, retail & CPG (13% QoQ) and lifesciences & healthcare (3.2% QoQ) led the growth. The company has maintained its revenue guidance of 9.5-11.5% in constant currency and margin guidance of 19.5-20.5%for FY19E....

Organic Pick-up And Slowing Value Compression In IMS Beyond FY19 Positives HCL Technologies' (HCLT) 2QFY19 QoQ CC revenue growth of 3% was in line with our estimate. Of this, a little less than 2% came from organic means, slightly better than anticipated. HCLT is confident of ~3% CQGR over 2Q-4Q to deliver on its FY19 growth guidance (9.5%-11.5% in CC terms). While at the beginning of FY19 it indicated equal contribution from organic and inorganic means, it seems organic growth is running a tad faster - a positive. However, organic growth (5%7%) continues to lag peers like TCS (10%-11%) and Infosys (7%-8%) and will continue to be a valuation headwind. Growth in BFSI, Europe and application services has been weaker than peers because of specific weakness in two European BFS customers. They will continue to be a drag...

HCL Technologies Ltd.'s earnings met estimates in the quarter ended September even as its margins remained flat. Sequentially HCL Technologies registered 7% rise in consolidated sales to Rs 14860 crore for...