Buy HCL At Every Dip To Accumulate; Stay Invested For Long

The Indian information technology sector contributes about 67 per cent of USD 124 to 130 billion market globally. Being an economic transformation of the country, the sector has performed a major role over the years. The cost effective IT service industry of India is about three to four times cheaper than the USA, continues to be the backbone of its Unique Selling Proposition (USP) in the global sourcing market. We are trying to analyse one of the major IT companies, HCL Technologies.

About The Company

HCL Technologies is engaged in computer programming, consultancy and related activities. The company provides a range of software services, business process outsourcing services and information technology (IT) infrastructure services. It operates through three segments viz. software services, IT infrastructure services and Business Process Outsourcing services.

HCL Technologies provides application development and maintenance, enterprise application, next generation software as a service (SAAS) application services and engineering, and research and development services to various clients across the world. Company’s geographical segments include America, Europe, India and others. It delivers solutions across various verticals, including financial services, manufacturing (automotive, aerospace, hi-tech and semiconductors), telecom, retail and consumer packaged goods services, energy and utility, healthcare and travel, transport and logistics.

Clients Base

HCL Technologies has added 1 client with USD 100 million+ ticket size to total 8 clients; 2 clients with USD 50 million+ to total 19; 7 clients with USD 40 million+ to total 29; 22 clients for USD 10 million+ to total 144 and 27 clients for USD 5 million+ ticket size to total 233 as of FY16.

Recent Acquisitions

HCL Technologies’ deal winning records remain strong during the latest quarter. The company acquired seven transformational deals worth in excess of USD 2 billion in total contract value (TCV), twice as compared with the usual USD 1 billon TCV. Effectively, the total number of transformational engagements during the nine month of FY16 stood at 25, with a TCV of more than USD 4 billion.

In October 2015, HCL Technologies announced the acquisition of PowerObjects in North America for a consideration of USD 46 million to widen its offerings in the application development space. In July 2015, it acquired some assets of Trygstad Technical Services, in an all-cash deal to deepen its expertise in core engineering, internet of things, embedded systems and intelligent systems.

IT Transformation Deal With Volvo Group

HCL Technologies signed significant IT outsourcing deal with the Volvo Group by acquiring its external IT business. The company added about 40 new customers from the Nordics countries and France to its portfolio.

HCL Technologies will deliver on a technology transformation roadmap that spans over 3500 applications, 20 plus data centres, over 11000 servers, 12 PB of storage, 20,000 MIPS of mainframe capacity and over 15000 network devices. As part of this roadmap, the company will also provide more than 65000 Volvo end users with access to productivity and user enablement solutions.

Takeover of Geometric

HCL Technologies is all set to acquire the business of Geometric. The company will acquire business of Geometric except for 58 per cent stake that Geometric owns in joint venture 3DPLM Software Solutions with Dassault Systemes. It will issue 15640546 equity shares of Rs 2 each.

Geometric is one of India’s leading PLM consulting, mechanical engineering and manufacturing services providers. The company's segments are products, software services and engineering services.

HCL will buy Geometrics’ IT services in all stock deal with value of around Rs 1300 crore. The company is looking to strengthen its engineering and automotive services portfolio. The stock swap will happen as Geometric shareholders will receive 10 shares of HCL for every 43 shares in Geometric.

HCL’s acquisition is the largest acquisition in the engineering services space. The deal has matured when Indian IT firms are looking for transition away servicing deals to higher margin digital business model. According to company’s management, the acquisition will provide several cross-sell and up-sell opportunities. The customers will benefit from a unique services portfolio of end-to-end engineering, R&D, digital technologies and internet of things capabilities.
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Financials of Geometric

Geometric’s consolidated QoQ Total Income from Operations came in at Rs 313 crore in Q4FY16 as against Rs 315 crores in Q3FY16 with reduction of 0.7 per cent. The company’s EBITDA also decreased by 5.2 per cent to Rs 52.83 crore in Q4FY16 on quarterly basis. However, its Net Profit increased by 18.3 per cent to Rs 34.26 crore in Q4FY16 as compared to Rs 28.96 crore in the previous quarter with an increment of 18.3 per cent.

On yearly basis Company’s consolidated total income from operations stood at RS 1234 crore as against Rs 1105 crores an increase of 11.6 per cent. EBITDA stood at Rs 177 crore as compared to Rs 130.05 crore an increase of 35.7 per cent. Net profit stood at Rs 105.35 crore at an increase of 91 per cent on the back of rising other income to Rs 49.09 crore.

HCL Technologies Financials:

HCL Technologies changed accounting its financial year end from June to March from FY16 onwards.

HCL Technologies financial performance over the past five years was better. The company’s top line grown about CAGR of 8.12 per cent to Rs 30781 crore as of nine month ended FY16. Its EBITDA too increased by CAGR of 12.33 per cent to Rs 6606 crore in FY16. HCL Technologies bottom line also rose by CAGR of 18.42 per cent to Rs 5643 crore in FY16.

Considering trailing twelve months (TTM) result, HCL Technologies revenue stood at Rs 40913 crore; up 14.6 per cent on yearly basis. The company’s net profit rose by 0.7 per cent to Rs 7354 crore in FY16 on yearly basis. On USD front, its revenue increased by 7.1 per cent to USD 623.5 crore and net profit up by 6.1 per cent to USD 111.8 crore in FY16 on yearly basis. HCL Technologies’ ROE stood at 20.54 per cent and ROCE at 25.13 per cent during FY16.

On latest quarter front, HCL Technologies net sales increased by 3.45 per cent to Rs 10698 crore in Q3FY16 as compared to previous financial year. The company’s EBITDA also rose by 6.92 per cent to Rs 2379 crore in Q3FY16 on quarterly basis. Its EBITDA margin expanded by 72 basis points to 22.24 per cent in Q3FY16 as compared to previous quarter. HCL Technologies other income reduced by 43.66 per cent to Rs 200 crore in Q3FY16 as compared to previous quarter. The company’s bottom line increased by just 0.13 per cent to Rs 1926 crore in Q3FY16 on quarterly basis. However, its Net Profit margin contracted by 57 basis points to 18 per cent in Q3FY16 on quarterly basis.

On segmental revenue front, HCL Technologies earned 59.24 per cent from Software segment, 35.98 per cent from Infrastructure segment and remaining 4.78 per cent from BPO segment during FY16.

On geographical segment front, the company’s Americas segment increased by 14.4 per cent in TTM FY16. The company’s Europe and Rest of the World (ROW) segments too rose by 9.8 per cent and 3.2 per cent respectively in TTM FY16 on yearly basis.

On verticals wise, HCL Technologies operates in various verticals viz. Life Science and Healthcare; Telecommunication, media, publishing & Entertainment; Public Services; Retail; Manufacturing and Financial Services. Meanwhile its Life Science and Healthcare vertical increased by 27.6 per cent, Telecommunication, media, publishing & Entertainment vertical rose by 22.4 per cent, public services also increased by 17.9 per cent in TTM FY16 on yearly basis.

On valuation front, HCL Technologies is trading at TTM PE multiple of 14.06x times which is lower as compared to industry PE multiple of 18.06x times. The company’s PE multiple is at attractive valuation as compared to peers such as Infosys, Wipro, Tech Mahindra and Mphasis are trading at PE multiple of 20.16x, 15.23x ,17.19 and 14.74x respectively.

Financial Forecast

According to the HCL Technologies, margins remained in the range of 20 per cent to 22 per cent for FY16. The company is going to see Volvo integration happening in the first half the FY17. Later part of FY17, it will have Geometric sort of acquisition kicking in and there will be a sort of lot of factors which are going to come. The big consolidation is happening in the company and therefore it has decided not to provide financial guidance for FY17.

Conclusion

HCL Technologies being one of the major IT company currently in position of consolidating state. The company will try to build strong balance sheet through numerous clients’ acquisitions done. Therefore, there is traction in the financials of the company. HCL Technologies is currently at an attractive valuation, hence we recommend our readers to BUY the scrip.