Reviving up the delivery engine
HCLT reported strong revenue growth of 4.2% QoQ CC significantly above estimates (Ple: 1.5%, Cons: 1.7%) of which organic growth accounted to 3.8% QoQ CC. Strong revenue growth was led by large deal wins won in earlier years, HCLT has won 78 transformation deals in FY19. Deal flow was strong in this quarter also, winning 12 transformational deals. Management expects industry leading organic growth in FY20E. EBIT margin came slightly below our estimates at 17.1% down 192bps QoQ (Ple: 17.5%). SG&A cost increased by 50bps to 12.8% of total revenues. Mode 1 (~70% of total revenues) EBIT margins declined by 270bps QoQ to 17.8%. Regardless of weak margin performance in Q1FY20 & upcoming wage hike in Q2FY20 management has maintained EBIT margin guidance of 18.5%-19.5% for FY20E.
We believe strong deal wins in earlier years coupled with healthy outlook for BFSI & IMS will help HCLT to achieve higher end of organic guidance. We believe HCLT is focusing on broad-based growth (e.g megadeal in BPO segment, investing in digital competencies) will reduced its dependence on IMS growth. We believe management is conservative on revenue guidance on account of weak & volatile external environment & have enough cushion to meet any potential slowdown in spending. HCLT has the potential to achieve the industry leading organic growth in FY20E. HCLT is trading at inexpensive valuations of ~11.8x FY21E valuations, we maintain our Buy rating (GARPgrowth at reasonable price) valuing HCLT at 14X FY21E earnings (30% discount to Infosys, 60% discount to TCS target multiple) & arrive at a changed TP of Rs. 1210. Stock is currently trading at 13.2x FY20E EPS and 11.8x FY21E EPS.
* Strong revenue growth performance: HCLT reported strong revenue growth of 4.2% QoQ CC significantly above estimates (Ple: 1.5%, Cons: 1.7%) of which organic growth accounted to 3.8% QoQ CC. Revenues at $2364 mn up 3.8% QoQ and way ahead than our & consensus estimates by 2.6%. (Ple: USD 2304mn, Cons: USD 2309mn). The Strong-Bridge Envision acquisition consolidated from April 1st, 2019 and contributed $11mn to the revenue (0.5% of the revenue).
* BFSI to recover in 2HFY20: Manufacturing showed a strong growth of 18.4% QoQ CC, BFSI was muted at 0.5% QoQ CC & technology grew by 5% QoQ CC. Retail vertical declined by -1.4% QoQ CC. Management has mentioned last quarter that weak performance will continue in BFSI vertical due to softness in a 2 clients in the capital markets segment, now in only 1 client weakness is there & management expect recovery in BFSI revenues in 2HFY20E. Among segments, IT services showed a growth of 3.6% QoQ CC, Engineering & R&D grew by 5.6% QoQ CC & products & platforms grew by 7% QoQ CC.
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