HCL Technologies Ltd. share price target

Funding structure: Around 48% / $852 million of the total deal will be paid at the close of the transaction (mid-2019 i.e June 2019) and the remaining amount of the purchase consideration will be paid after the end of a year. The acquisition will be financed largely through internal accruals and a debt of $300 million at close of the deal. The company had...

OPM fell 150 basis points to 23.3% which saw OP rise 7% to Rs 3237 crore. Other income grew 8% to Rs 325 crore. After providing for depreciation (up 11% to Rs 476 crore), PBT grew 7% to Rs 3066 crore....

Revenue grew by 5.31% to Rs. 13878.0 Cr in Q1FY19 when compared to the previous quarter. HCL Technologies Ltd Q1FY19 results Comment

Revenue Misses; Strong Positioning in Key Segments to Drive Growth HCL Technologies (HCLT) delivered a modest performance in 1QFY19 with USD revenue rising by paltry 0.8% QoQ (0.8% below our estimate), while in CC terms it rose by 2.7% QoQ. Segment-wise revenue was led by BPO, which grew 34.4% QoQ, aided by consolidation of C3i Solutions. Engineering and R&D; Services business grew by 2.9% QoQ. On the flip side, while Core Application Services witnessed sustained pressure with 1.2% QoQ decline in revenue, IMS revenue fell by 2.2% QoQ. Led by higher employee cost, EBIT margin missed our estimates by 29bps. Looking ahead, the IT major has maintained earlier CC revenue growth guidance...

PAT of | 2,403 crore was above our | 2,284 crore estimate led by higher other income (| 153 crore in Q1FY19 vs. | 119 crore in Q4FY18) and lower tax rate (20.6% as a percentage of PBT vs. 22.1%...

Maintain BUY with TP of Rs 1,155 (15x FY20E). HCL Tech (HCLT) posted a soft 1Q. However, guidance/deal wins are indicative of acceleration ahead. Revenue at USD 2,055mn was 2.7/8.5% QoQ/YoY in CC with impact of India-SI business decline (USD 12mn, -0.6% QoQ impact). EBIT% was flat at 19.7%, 7bps QoQ as gross margin decline (C3i integration, deal transition) was offset by lower SG&A;%. APAT at Rs 24.03bn was supported by a lower tax rate.

HCL reported organic revenue growth in 1QFY19 a tad below our estimates, likely on higher than expected pricing resets in some of the extant large contracts/renewals + delays in the start of new deals. However, a strong order booking (highest-ever') should help the growth recover through 2Q-4QFY19. Management's stance was incrementally positive and improved disclosures, especially on the IP partnerships, should help increase investors' confidence, more so, given the stock's inexpensive valuations at c.13x FY20F EPS, HCL trades at 27%/5% discount to INFO/TECHM. A 4% dividend + buyback yield also limits the downside risk....

HCLTs payout ratio has consistently improved to ~53% in FY18 from ~20% in FY13. In FY18, the combination of dividend and buyback (INR160b) led to a payout of 53% of PAT. While it paid out INR35b in the form of buyback, it also paid out a dividend of INR8 per share. While the buyback would take the ratio to 40% on our FY19 PAT estimate, we expect a dividend of INR10 per share for the year. Since the last year, TCS, INFO, WPRO and HCLT have all announced buybacks. While we believe the case for valuation uptick would depend on the positioning in Digital and the financial performance, an upshift in dividend payout, and the consequent yield return and improved return ratios together bode well in keeping valuations buoyant. We maintain IBM deals and/or [2] turnaround in core areas of Application Services and IMS.

Management's revenue growth guidance of 9.5-11.5% in CC terms in FY19, implies organic growth of 4.25-6.25% is quite disappointing in the face of expected turnaround in the IMS business. We factor revenue CAGR of 11% over FY18-20E owing to healthy deal pipeline, traction in digital business, expected turnaround in IMS business and further investment in IP deals to broaden its product offerings. Given soft organic revenue growth guidance and continued higher inorganic...