INSTITUTIONAL EQUITY RESEARCH
HCL Technologies (HCLT IN) Geometric acquisition highlights THREE key trends
Page | 1 | PHILLIPCAPITAL INDIA RESEARCH
INDIA | IT SERVICES | Company Update
4 April 2016
HCL Tech recently announced its acquisition of Geometric Ltd, a provider of engineering services and PLM Solutions, in an all stock deal, at 32% premium to the current market price of the company. We find this deal highly interesting and indicative of the future trends in the industry – trends that we had highlighted in our past reports. Midcaps facing the brunt of competition Firstly, the deal highlights the stress, most of the mid‐cap IT services companies are going through, on the back of high vertical/client concentration and increasing competition even in small deals. Geometric had reported USD revenue CQGR of 1.2% over the last seven quarters, on the back of decline in its top account, which constituted 28% of its revenues. Over the last six months we have seen similar transactions with iGate being acquired by CapGemini and Polaris being acquired by Virtusa. We would like to highlight that we had predicted the same in our Sep‐14 report (read here). We see KPIT Tech, NIIT Tech and Cyient as potential candidates for acquisitions. Engineering Research & Design (ERD): Segment with huge growth potential Secondly, the deal marks the growing importance of the Engineering Research & Design (ERD) domain, where IT Services companies are looking to increase their presence, on the back of domain expertise developed over the last decade and abundant supply of engineers. HCL Tech remains the largest Indian IT Services player in this domain, with revenues of US$ 1.2bn in CY15 – it has further cemented its place in the segment, as it gets access to Geometric Ltd’s 60 clients. We had done a detailed analysis of the ERD domain, in our ‘Ground View’ report in June‐15 (read here). Making amends to the inefficient capital allocation policy of the last decade Lastly, in our recent report (read here), we had downgraded the IT sector, on the back of the companies’ inefficient capital allocation policy, over the last decade, which we expect will lead to subdued growth over the next three years. Here we had highlighted that the top‐4 IT Services companies spent only 9% of the OCF generated over the last decade on acquisition, while sitting idle on 34%. We expect the companies to now make amends over the next two years – a trend that we have already seen with the recent series of acquisitions by Infosys, Mindtree and Wipro. However, only acquisitions in the digital/ERD or other upcoming technology domains will lead to sustainable growth over the next three‐five years, in our opinion. The deal – value accretive for HCL in the long term As for the deal, its a perfect win‐win for both Geometric and HCL Tech shareholders. Geometric shareholders get a 32% premium over the last week’s closing price, in the form of preference shares (Rs 68 per share) of 3DPLM (an erstwhile JV between Geometric and Dassault Systems), with dividend of 7%. HCL Tech, though ends up paying a premium, acquires US$ 140mn Engg Services business, giving it access to host of new clients. The company can expect significant synergies from the minimum client overlap, and the opportunity to cross sell its ERD expertise to those clients. The acquisition is expected to be marginally EPS dilutive (‐0.6%) and values Geometric at 1.4x EV/Sales and 15x P/E (CY15).
We have not made any changes to our estimates yet, for HCL Tech, awaiting approvals for the deal. We maintain NEUTRAL rating on the stock with price target of Rs 900.
NEUTRAL (Maintain) CMP RS 840 TARGET Rs 900 (+7%) COMPANY DATA O/S SHARES (MN) : 1410MARKET CAP (RSBN) : 1157MARKET CAP (USDBN) : 17.552 ‐ WK HI/LO (RS) : 1048 / 786LIQUIDITY 3M (USDMN) : 22.3PAR VALUE (RS) : 2 SHARE HOLDING PATTERN, % Dec 15 Sep 15 Jun 14PROMOTERS : 60.6 60.6 60.6FII / NRI : 28.4 28.4 28.9FI / MF : 4.9 4.9 4.5NON PRO : 1.2 1.2 1.2PUBLIC & OTHERS : 4.9 4.9 4.8 PRICE PERFORMANCE, %
1MTH 3MTH 1YRABS ‐1.4 ‐2.9 ‐12.6REL TO BSE ‐7.6 0.5 ‐2.1 PRICE VS. SENSEX
60
80
100
120
140
160
Apr‐14 Oct‐14 Apr‐15 Oct‐15
HCL Tech BSE Sensex Source: Phillip Capital India Research KEY FINANCIALS Rs mn FY16E FY17E FY18ENet Sales 421.8 467.8 515.8EBIDTA 91.9 104.4 115.3Net Profit 74.0 84.0 93.8EPS, Rs 52.4 59.5 66.4PER, x 16.1 14.2 12.7EV/EBIDTA, x 11.6 9.9 8.7P/BV, x 4.1 3.5 3.0ROE, % 25.3 24.7 23.8
Source: PhillipCapital India Research Est. Vibhor Singhal (+ 9122 6667 9949) [email protected] Shyamal Dhruve (+ 9122 6667 9992) [email protected]
HCL TECHNOLOGIES COMPANY UPDATE
Midcaps facing the brunt of competition Read our report on our expectations of M&A activity in the midcap IT space here
HCL’s buyout of Geometric is a glaring evidence of the competition that most of the midcap IT Services companies are facing today. Over the last seven quarters, Geometric has reported revenue CQGR of 1.2%. The muted and highly volatile performance has been led by ramp down at one of its largest client, and its inability to mitigate that growth from other clients. Geometric’s performance has been highly volatile over the last 7 quarters Growth 1QFY15‐3QFY16 Revenue share 3QFY16 US$ revenues CQGR 1.2% Top client 28% INR revenues CQGR 2.9% Top 5 client 56% PAT CQGR 8.9% Top 10 clients 71%
Source: Companies, PhillipCapital India Research Over the last few quarters, we have seen most midcap IT Services companies reeling under the competitive pressure. High vertical/client concentration has meant that any ramp down in key client impacts the growth for multiple quarters. Also with deal sizes and tenures shrinking, the competition in smaller deals has increased significantly – with the large IT Services companies, as well as niche start‐ups trying to capture share of the shrinking pie. Most midcap companies reeling the competition pressure over last few quarters Last 7 quarters KPIT Tech NIIT Tech Polaris Cyient GeometricUS$ revenues CQGR 1.1% 1.2% 0.1% 2.2% 1.2%PAT CQGR 6.4% 9.3% ‐2.3% 3.9% 8.9%Top 5 clients rev share 27% 33% 39% 35% 56%Top 10 clients rev share 39% 45% 53% 49% 71%
Source: Companies, PhillipCapital India Research In these turbulent times, we expect most midcap IT companies to seek a timely exit. We expect few of these companies to either merge together to form a formidable force, or some of the large IT Services companies to acquire one of them. We have already seen three similar acquisitions in the last six months, and expect many more over the next few quarters. The high competitive pressure has led to many midcap companies ‘cashing‐out’
Target Co Acquirer Date Acquisition Value
(US$ mn)Sales
(US$ mn) EV/SalesGeometric Ltd HCL Tech Apr '16 192 135 1.4Mphasis Blackstone Apr '16 1,390 932 1.5Polaris Virtusa Nov '15 348 310 1.1Zensar Apax Partners Oct '15 57 45 1.3Serco Blackstone Sep '15 383 480 0.8Infogain Chryscap Aug '15 63 NA NAiGate CapGemini Apr '15 4,040 1,270 3.2
Source: Companies, PhillipCapital India Research We note that we had predicted this trend about 18 months back. In our Sep‐14 note, we had highlighted growing competition and rerating potential to lead to heightened M&A activity in the sector. We had also forecasted most likely candidates for acquisition – two of them (Polaris and Hexaware) have already been acquired. We see the remaining three (KPIT Tech, NIIT Tech and Cyient) as the next potential candidates for merger/acquisition.
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HCL TECHNOLOGIES COMPANY UPDATE
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Engineering Research & Design (ERD): Huge growth potential Over the last decade, Indian IT Services companies have developed significant capabilities and domain expertise in the field of ERD. The top‐4 IT Services companies have reported CAGR of 11% over the last five years in this domain (17% excl Wipro) – higher than the overall industry growth. ERD space has witnessed stupendous growth for the top‐4 (apart from Wipro) ERD (US$ mn) FY10 FY11 FY12 FY13 FY14 FY15 CAGR % of RevsTCS 318 395 473 535 632 699 17% 5%Infosys 106 146 238 246 270 298 23% 3%HCL Tech 510 644 774 821 881 1,087 16% 18%Wipro 694 726 734 689 673 694 0% 10%Total top‐4 1,629 1,911 2,219 2,291 2,456 2,779 11% 7%
Source: Companies, Phillip Capital India Research In FY14, global ERD spend grew by ~3% to US$ 1.44tn. Automotive and consumer electronics sectors accounted for over 25% of this spend—automotive driven by safety and emission‐ efficiency requirements and consumer electronics driven by increasing demand for new products and interfaces. US and Europe continued to account for over 2/3rd of this spend with Asia (excluding Japan) constituting 10% and growing fast. Currently, the engineering services outsourcing (ESO) market stands at US$ 80bn – only 6% of the total global ERD spend. Of this US$ 80bn, China accounts for the largest market share (25%), driven by its manufacturing industry. India comes in close second (24%), driven primarily by the captives (55%) and third party outsources (45%). Of the third party outsourcers, the top‐4 IT Services companies have almost 30% market share. The global ERD‐ESO market
Source: NASSCOM, Zinnov, PhillipCapital India Research Historically most global engineering companies have been reluctant to outsource their R&D – because of obvious concerns of intellectual property theft and perception of inferior capabilities of the Indian companies. However, over the last two decades, we have seen a significant increase in the ERD outsourcing deals – with new client joining the bandwagon, as well as, existing clients outsourcing larger and more strategic share of their ERD work.
China, 25.0%
Captives, 55.0%
Top‐4 IT, 30.7%
Outsourced, 5.6%
India,24.0%
Third Party, 45.0%
Others, 69.3%
Others, 51.0%
0%
20%
40%
60%
80%
100%
Global ERD Spend Global ESO Market India ESO Market Indian Third‐party ESO Market
US$ 1.4trn US$ 80bn US$ 19.2bn US$ 8.6bn
Read our detailed report on the potential of the ERD segment here
HCL TECHNOLOGIES COMPANY UPDATE
Evolution of the ESO industry
Source: PhillipCapital India Research Top five imperatives for engineering services providers
0%
5%
10%
15%
20%
25%
30%
35%
Reduce operational cost
Drive product innovation
Shorten TTM Improve quality Emerging market focus
Source: HCL Tech Waves Propelling the Engineering Service Industry Technology Shift Industry Examples Wave 1, 2000‐2010
Embedded software in the product and product ecosystem
• Auto manufacturing – telematics and infotainment • Healthcare – medical devices and implants • Consumer electronics – embedded intelligence in white goods
Wave 2, 2010‐2017
IoT/M2M adoption and Digital transformation. (IT envelopes the product)
• Auto – V2V, V2I, driver assistance • Smart homes ‐ connected home appliances • Healthcare ‐ remote and continuous monitoring • Engineering information management
Wave 3, 2015 onwards
Integrating manufacturing with engineering and IT systems; and 3‐D or Additive Printing (IoT evolution)
• Smart manufacturing • PLM‐MES‐ERP integration – leveraging social media and analytics to drive product usage and design
• Digital oil fields ‐ integrated, optimized asset utilization
• 3‐D and additive printing applications Source: ISG The Indian IT Service companies are now able to contribute more to the client than just being a relatively inexpensive alternative. The Indian companies have also been helped by the abundant pool of engineers, which the country produces every year. ERD being a highly technical domain, requires engineers trained on specific CAD/CAM platforms, as against an IT graduate for traditional IT Services contract.
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HCL TECHNOLOGIES COMPANY UPDATE
India accounts for the largest pool of engineers graduating every year
0
50,000
100,000
150,000
200,000
250,000
300,000
1,250,000
1,500,000
Source: OECD, AICTE Poles apart – ERD and other traditional IT service lines Parameter Traditional service lines Engineering research and design Educational/technical qualification of the 'developer'
Software developers Engineers—preferably Mechanical/Electrical
Training to be imparted to the 'developer' before induction
Various software platforms like Java, .net, C++ Various engineering design platforms like CATIA, SolidWorks, Pro/E
Nature of project deliverable Customized software solution, with post‐delivery maintenance
Parts of the Product Life‐cycle Management (PLM), that can be integrated with various such deliverables from across the globe
Failure risk Medium ‐ Problems in the deliverable can be fixed in post‐delivery maintenance period
High ‐ Problems in deliverable can lead to faulty product design for the client; can lead to potential loss of client
Major verticals BFSI, manufacturing, telecom ‐ across the spectrum
Manufacturing ‐ auto, aerospace, consumer electronics; healthcare ‐ medical devices
Project duration Medium to long: varying from 2‐ 7 years (for IMS) Short: Less than 12‐18 months
Source: PhillipCapital India Research Key ESOs in each vertical
Automotive Aerospace Energy & Utilities Consumer Electronics Captives Bosch Airbus Shell Samsung
Daimler Honeywell Petrofac LG Ford Schlumberger Phillips
Third party KPIT Cyient Wipro TCS Infosys HCL Tech Quest Mindtree Tata Technologies Tech Mahindra Geometric HCL
TCS Aker Solutions Tata Elxsi Key strengths of the key companies TCS Infosys HCL Tech Wipro Tech Mahindra All sectors ‐ Auto/Aero/Com‐sumer Electronics
Overall weak presence ‐ mainly Aerospace
Avionics Medical devices Product design
Geometric Ltd Quest Cap Gemini IBM Accenture Product Lifecycle manage‐ment
After sales ‐ esp for aerospace
Technical Publication / Documentation
Process Consultation / PLM implementation
Process Consultation / PLM implementation
Source: PhillipCapital India Research In the wake of the deal sizes shrinking in the traditional IT services domain, and cannibalization of revenues by new age digital platforms like cloud and analytics, we expect ERD to provide some respite to Indian IT Services companies. We expect more companies to focus on this segment, and acquire companies with existing capabilities/clientele in ERD. For these reasons, we see Cyient and KPIT Tech as highly likely candidates for acquisition.
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HCL TECHNOLOGIES COMPANY UPDATE
Making amends to the inefficient capital allocation policy of the last decade In our recent report in Dec‐15, we downgraded the IT sector to underweight. The core of our argument was that the Indian IT companies have followed a highly inefficient capital allocation policy in the last decade – by sitting on excessive cash instead of investing it to acquire capabilities. This will lead to the companies being sandwiched between two layers of global behemoths (Accenture, IBM) and niche start‐ups in the enterprise digital space – leading to subdued topline and earnings growth over the next three years.
Read our detailed report on the inefficient capital allocation policy of the Indian IT companies here
Utilization of the OCF generated over the last decade Rs mn TCS Infosys Wipro HCL Tech TotalRevenue 53,41,604 28,95,800 28,87,561 17,38,637 1,28,63,602OCF 8,66,621 5,81,590 4,34,505 2,68,958 21,51,674Dividend 4,34,687 2,40,310 1,42,558 90,833 9,08,387Capex 1,74,652 1,59,880 1,04,468 67,693 5,06,694Cash added 1,95,216 2,85,140 1,55,643 97,991 7,33,990Acquisitions 41,955 37,030 74,114 37,846 1,90,944
TCS Infosys Wipro HCL Tech Total Dividend Payout Ratio 36.9% 34.1% 28.7% 33.8% 34.3%Dividend as a % of OCF 50.2% 41.3% 32.8% 33.8% 42.2%Capex as % of OCF 20.2% 27.5% 24.0% 25.2% 23.5%Cash added as % of OCF 22.5% 49.0% 35.8% 36.4% 34.1%Acquisition as % of OCF 4.8% 6.4% 17.1% 14.1% 8.9%
Source: Company, PhillipCapital India Research Over the last 18 months, alarmed by the rise in number of start‐ups with digital enterprise solutions and clients’ demand for the same, most of the IT Services companies have started making amends to their capital allocation policy. Cognizant, Infosys, Wipro and Mindtree have all acquired multiple companies in the last 18 months – some in the traditional IT Services space, and other in the new age digital space. We expect heightened M&A activity in the sector – with large companies using their huge cash piles to acquire delivery capabilities and/or gain access to new set of clients. Recent acquisitions by Indian companies Company Acquisitions in Traditional Space Acquisitions in Digital / ERD space Infosys Lodestone Skava, Panaya, Noah ConsultingTCS Alti, Neotel ‐ Wipro Cellent, VITEOS, Healthplan DesignitHCL Tech Axon GeometricMindtree Aztecsoft Discoverture, Bluefin, Relational TechM Satyam, Comviva, BASF, LCC Sofgen
Source: Company, PhillipCapital India Research
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HCL TECHNOLOGIES COMPANY UPDATE
The deal HCL Tech has agreed to buy out the entire business of Geometric (excluding 3DPLM – its 58:42 JV with Dassault Systems). The sale is to take place in two steps: • Demerger of the core Geometric business from 3DPLM and its acquisition by
HCL Tech: The 10:43 share swap agreement means HCL Tech will issue 10 shares of HCL Tech to every shareholder with 43 shares of the erstwhile Geometric Ltd.
• Acquisition of the Geometric’s 58% stake in 3DPLM by Dassault Systems (DS): DS will issue 1 preference share of 3DPLM for every 1 share held by the erstwhile Geometric Ltd’s shareholders. The preference share is priced at Rs 68 per share, and carries a dividend of 7%, redeemable every quarter.
The deal essentially prices Geometric at 32% premium to the last week’s closing price. This was after the Geometric stock had already run‐up 20% in the last one month. The deal gives 32% premium to Geometric’s shareholders
HCL Share Swap 3DPLM Share Swap TotalSwap Ratio 10:43 1:1New share value (Rs) 820.0 68.0 Value to Geometric shareholder (Rs per share) 190.7 68.0 258.7 Implicit Business Value (Rs bn) 12.4 4.4 16.8 % Premium to Friday closing ‐2.8% 34.7% 31.9%
Source: Company, PhillipCapital India Research Benefit to Geometric shareholders The promoters of Geometric Ltd get a handsome exit with this deal. They and other minority shareholders get 32% premium to last week’s closing price. • The 10:43 share swap with HCL Tech provides them with par value of their
Geometric shares. • The preference shares of 3DPLM give them an additional Rs68 per share of value,
in the form of redeemable preference shares, pending RBI approval. • Incase RBI approval is not received, DS will issue 24 fully paid‐up equity shares of
unlisted 3DPLM, for every 1793 shares of Geometric, which shall be compulsorily purchased by DS at price of Rs 5,080 per share (which translates into Rs 68 per share).
Benefit to HCL Tech shareholders For HCL Tech shareholders, the deal is marginally dilutive in the near term, but potentially value accretive in the longer term. The company has acquired the stake at a handsome premium – acquiring 70% of the business for 100% of the market value. However, the shareholders can take solace in the fact that it is a share swap deal, and the company doesn’t pay out any cash for the acquisition. In the near term: • The acquisition is 0.6% EPS dilutive, on the back of lower margin profile of
Geometric and issuance of new shares. • Geometric has been struggling in the last few quarters, with revenue CQGR of
1.2%, due to decline in its top account. It might be few quarters before growth revives.
• Excluding 3DPLM, DS contributes ~3% of Geometric’s revenues – which is expected to decline over the next few quarters, as its OSPD association with Geometric ends with this transaction.
• Many of Geometric’s products are add‐ons or translators (which convert files which are DS products compatible to files compatible with products from competitors like PTC). With the DS association ending, we fear for the viability of these products.
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HCL TECHNOLOGIES COMPANY UPDATE
Overall, we expect the $135mn annual revenues of Geometric, that HCL Tech acquired, to decline, or at best, remain stagnant over the next few quarters. Slightly expensive acquisition for HCL, 0.6% EPS dilutive Acquisition Value (Rs bn) 12.4 Geometric CY15 Revenues (US$ mn) 135.2 Geometric CY15 PAT (Rs mn) 371.3 EV/Sales 1.4x P/E* 15.6x abcd No of new HCL shares to be issued (mn) 15.6 CY15 HCL PAT (Rs mn) 69,920.0 CY15 HCL EPS (Rs) 49.7 CY15 HCL Proforma PAT (Rs mn) – incl Geometric 70,291.3 CY15 HCL Proforma EPS (Rs) – incl Geometric 49.4 % dilution ‐0.6%
Source: Company, PhillipCapital India Research (* Using annualized Q3FY16 PAT for P/E) In the longer term: • HCL Tech gains access to large clients in the manufacturing and automotive
space, to which it can cross‐sell its ERD capabilities. HCL Tech is currently the third largest player in the ERD outsourcing space, lagging behind Altran Technologies and Alten SA.
• HCL Technologies can further improve Geometric’s business margins by higher offshoring and rationalization of the employee pyramid.
HCL Tech closing in, on the top ERD outsourcing companies in the world
Country Market Cap (US$ bn) ERD Revenue (US$ bn)Altran Technologies France 2.5 2.2 Alten SA France 2.1 1.8 HCL Technologies India 17.7 1.2
Source: Company, PhillipCapital India Research
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HCL TECHNOLOGIES COMPANY UPDATE
Financials
Income Statement Y/E June, Rs mn FY15 FY16E FY17E FY18ENet sales 370,620 421,750 467,802 515,772Growth, % 13 14 11 10Employee expenses ‐237,970 ‐277,065 ‐308,391 ‐339,926Other Operating expenses ‐45,630 ‐52,741 ‐55,026 ‐60,587EBITDA (Core) 87,020 91,945 104,386 115,260Growth, % 0.4 5.7 13.5 10.4Margin, % 23.5 21.8 22.3 22.3Depreciation ‐4,510 ‐5,844 ‐6,020 ‐6,679EBIT 82,510 86,101 98,366 108,581Growth, % 4.0 4.4 14.2 10.4Margin, % 22.3 20.4 21.0 21.1Other Non‐Operating Income 9,320 7,806 8,615 10,871Forex Gains\ (Losses) ‐200 725 0 0Pre‐tax profit 91,630 94,631 106,980 119,452Tax provided ‐19,080 ‐20,628 ‐23,001 ‐25,682Profit after tax 72,550 74,003 83,980 93,770Non Recurring Item 0 0 0 0Net Profit 72,550 74,003 83,980 93,770Growth, % 13.9 2.0 13.5 11.7Net Profit (adjusted) 72,550 74,003 83,980 93,770Wtd avg shares (m) 1,411 1,412 1,412 1,412 FY15 FY16E FY17E FY18EUS$ Revenue ($ mn) 5,953 6,455 7,197 7,935Growth, % 11.1 8.4 11.5 10.3Re / US$ (rate) 62.3 65.3 65.0 65.0
Balance Sheet Y/E June, Rs mn FY15 FY16E FY17E FY18ECash & bank 13,520 22,585 30,373 45,921Marketable securities at cost 104,370 118,362 138,362 158,362Debtors 94,860 105,149 116,630 128,590Inventory 0 0 0 0Other current assets 23,380 29,876 33,158 36,736Total current assets 236,130 275,972 318,523 369,609Investments 80 1,633 2,133 2,133Net fixed assets 120,900 137,677 153,488 169,172Non‐current assets 0 0 0 0Total assets 357,110 415,282 474,144 540,914Total current liabilities 92,320 110,067 122,511 135,039Non‐current liabilities 17,280 12,733 11,405 11,405Total liabilities 109,600 122,800 133,916 146,444Paid‐up capital 1,341 1,341 1,341 1,341Reserves & surplus 246,170 291,141 338,888 393,129Minorities 0 0 0 0Shareholders’ equity 247,510 292,482 340,228 394,470Total equity & liabilities 357,110 415,282 474,144 540,914 Source: Company, PhillipCapital India Research Estimates
Cash Flow Y/E June, Rs mn FY15 FY16E FY17E FY18EPre‐tax profit 91,630 94,631 106,980 119,452Depreciation 4,510 5,844 6,020 6,679Chg in working capital ‐9,555 962 ‐2,319 ‐3,010Total tax paid ‐19,080 ‐20,628 ‐23,001 ‐25,682Other operating activities 0 0 0 0Cash flow from operating activities 67,505 80,808 87,681 97,439Capital expenditure ‐18,991 ‐22,620 ‐21,831 ‐22,363Chg in investments 76 ‐1,553 ‐500 0Chg in marketable securities ‐14,578 ‐13,992 ‐20,000 ‐20,000Other investing activities 0 0 0 0Cash flow from investing activities ‐33,493 ‐38,165 ‐42,331 ‐42,363Free cash flow 34,012 42,643 45,350 55,075Equity raised/(repaid) 0 0 0 0Debt raised/(repaid) ‐4,844 ‐4,547 ‐1,328 0Dividend (incl. tax) ‐37,773 ‐36,221 ‐36,233 ‐39,528Other financing activities 11,919 7,190 0 0Cash flow from financing activities ‐30,698 ‐33,578 ‐37,561 ‐39,528Net chg in cash 3,314 9,065 7,789 15,548 Valuation Ratios
FY15 FY16E FY17E FY18EPer Share data EPS (INR) 51.4 52.4 59.5 66.4Growth, % 14.1 1.9 13.5 11.7Book NAV/share (INR) 175.4 207.1 241.0 279.5CFPS (INR) 41.2 51.7 56.0 61.3DPS (INR) 22.9 21.9 21.9 23.9Return ratios Return on assets (%) 21.9 19.2 18.9 18.5Return on equity (%) 29.3 25.3 24.7 23.8Return on capital employed (%) 29.8 26.0 25.6 24.8Turnover ratios Asset turnover (x) 2.7 2.7 2.7 2.7Sales/Total assets (x) 1.1 1.1 1.1 1.0Sales/Net FA (x) 3.3 3.3 3.2 3.2Working capital/Sales (x) 0.1 0.1 0.1 0.1Receivable days 93.4 91.0 91.0 91.0Liquidity ratios Current ratio (x) 2.6 2.5 2.6 2.7Quick ratio (x) 2.6 2.5 2.6 2.7Dividend cover (x) 2.2 2.4 2.7 2.8Total debt/Equity (%) 7.0 4.4 3.4 2.9Net debt/Equity (%) 1.5 (3.4) (5.6) (8.7)Valuation PER (x) 16.3 16.0 14.1 12.6PEG (x) ‐ y‐o‐y growth 1.2 8.3 1.0 1.1Price/Book (x) 4.8 4.1 3.5 3.0Yield (%) 2.7 2.6 2.6 2.9EV/Net sales (x) 2.9 2.5 2.2 1.9EV/EBITDA (x) 12.4 11.5 9.8 8.6EV/EBIT (x) 13.1 12.3 10.4 9.1
HCL TECHNOLOGIES COMPANY UPDATE
Stock Price, Price Target and Rating History
B (TP 628)
B (TP 630) B (TP 785)
B (TP 840)B (TP 820)
B (TP 885) B (TP 910)
B (TP 965)
B (TP 1030)
B (TP 1100) B (TP 1050)
B (TP 1000)
B (TP 1000)
B (TP 1025)
B (TP 1080)
B 9TP 1060) B (TP 1000)N (TP 900)N (TP 900)
200
300
400
500
600
700
800
900
1000
1100
A‐13 S‐13 N‐13 D‐13 J‐14 M‐14 M‐14 J‐14 A‐14 S‐14 N‐14 D‐14 F‐15 M‐15 M‐15 J‐15 A‐15 S‐15 N‐15 D‐15 F‐16 M‐16
Rating Methodology We rate stock on absolute return basis. Our target price for the stocks has an investment horizon of one year. Rating Criteria Definition
BUY >= +15% Target price is equal to or more than 15% of current market price
NEUTRAL ‐15% > to < +15% Target price is less than +15% but more than ‐15%
SELL <= ‐15% Target price is less than or equal to ‐15%.
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HCL TECHNOLOGIES COMPANY UPDATE
Management(91 22) 2483 1919
Kinshuk Bharti Tiwari (Head – Institutional Equity) (91 22) 6667 9946(91 22) 6667 9735
Research IT Services Pharma & Speciality Chem
Dhawal Doshi (9122) 6667 9769 Vibhor Singhal (9122) 6667 9949 Surya Patra (9122) 6667 9768Nitesh Sharma, CFA (9122) 6667 9965 Shyamal Dhruve (9122) 6667 9992 Mehul Sheth (9122) 6667 9996Banking, NBFCs Infrastructure StrategyManish Agarwalla (9122) 6667 9962 Vibhor Singhal (9122) 6667 9949 Naveen Kulkarni, CFA, FRM (9122) 6667 9947Pradeep Agrawal (9122) 6667 9953 Deepak Agarwal (9122) 6667 9944 Anindya Bhowmik (9122) 6667 9764Paresh Jain (9122) 6667 9948 Logistics, Transportation & Midcap TelecomConsumer & Retail Vikram Suryavanshi (9122) 6667 9951 Naveen Kulkarni, CFA, FRM (9122) 6667 9947Naveen Kulkarni, CFA, FRM (9122) 6667 9947 Media Manoj Behera (9122) 6667 9973Jubil Jain (9122) 6667 9766 Manoj Behera (9122) 6667 9973 TechnicalsPreeyam Tolia (9122) 6667 9950 Metals Subodh Gupta, CMT (9122) 6667 9762Cement Dhawal Doshi (9122) 6667 9769 Production ManagerVaibhav Agarwal (9122) 6667 9967 Yash Doshi (9122) 6667 9987 Ganesh Deorukhkar (9122) 6667 9966Economics Midcap EditorAnjali Verma (9122) 6667 9969 Amol Rao (9122) 6667 9952 Roshan Sony 98199 72726Engineering, Capital Goods Mid‐Caps & Database Manager Sr. Manager – Equities SupportJonas Bhutta (9122) 6667 9759 Deepak Agarwal (9122) 6667 9944 Rosie Ferns (9122) 6667 9971Hrishikesh Bhagat (9122) 6667 9986 Oil & Gas
Sabri Hazarika (9122) 6667 9756Sales & Distribution Ashvin Patil (9122) 6667 9991 Sales Trader Zarine Damania (9122) 6667 9976Shubhangi Agrawal (9122) 6667 9964 Dilesh Doshi (9122) 6667 9747 Kishor Binwal (9122) 6667 9989 Suniil Pandit (9122) 6667 9745Bhavin Shah (9122) 6667 9974 ExecutionAshka Mehta Gulati (9122) 6667 9934 Mayur Shah (9122) 6667 9945
Corporate Communications
Vineet Bhatnagar (Managing Director)
Jignesh Shah (Head – Equity Derivatives)
Automobiles
Contact Information (Regional Member Companies)
SINGAPORE
Phillip Securities Pte Ltd 250 North Bridge Road, #06‐00 RafflesCityTower,
Singapore 179101 Tel : (65) 6533 6001 Fax: (65) 6535 3834
www.phillip.com.sg
MALAYSIA Phillip Capital Management Sdn Bhd B‐3‐6 Block B Level 3, Megan Avenue II,
No. 12, Jalan Yap Kwan Seng, 50450 Kuala Lumpur Tel (60) 3 2162 8841 Fax (60) 3 2166 5099
www.poems.com.my
HONG KONG Phillip Securities (HK) Ltd
11/F United Centre 95 Queensway Hong Kong Tel (852) 2277 6600 Fax: (852) 2868 5307
www.phillip.com.hk
JAPAN Phillip Securities Japan, Ltd
4‐2 Nihonbashi Kabutocho, Chuo‐ku Tokyo 103‐0026
Tel: (81) 3 3666 2101 Fax: (81) 3 3664 0141 www.phillip.co.jp
INDONESIA PT Phillip Securities Indonesia
ANZTower Level 23B, Jl Jend Sudirman Kav 33A, Jakarta 10220, Indonesia
Tel (62) 21 5790 0800 Fax: (62) 21 5790 0809 www.phillip.co.id
CHINA Phillip Financial Advisory (Shanghai) Co. Ltd.
No 550 Yan An East Road, OceanTower Unit 2318 Shanghai 200 001
Tel (86) 21 5169 9200 Fax: (86) 21 6351 2940 www.phillip.com.cn
THAILAND Phillip Securities (Thailand) Public Co. Ltd.
15th Floor, VorawatBuilding, 849 Silom Road, Silom, Bangrak, Bangkok 10500 Thailand
Tel (66) 2 2268 0999 Fax: (66) 2 2268 0921 www.phillip.co.th
FRANCE King & Shaxson Capital Ltd.
3rd Floor, 35 Rue de la Bienfaisance 75008 Paris France
Tel (33) 1 4563 3100 Fax : (33) 1 4563 6017 www.kingandshaxson.com
UNITED KINGDOM King & Shaxson Ltd.
6th Floor, Candlewick House, 120 Cannon Street London, EC4N 6AS
Tel (44) 20 7929 5300 Fax: (44) 20 7283 6835 www.kingandshaxson.com
UNITED STATES Phillip Futures Inc.
141 W Jackson Blvd Ste 3050 The Chicago Board of TradeBuilding
Chicago, IL 60604 USA Tel (1) 312 356 9000 Fax: (1) 312 356 9005
AUSTRALIA PhillipCapital Australia
Level 37, 530 Collins Street Melbourne, Victoria 3000, Australia
Tel: (61) 3 9629 8380 Fax: (61) 3 9614 8309 www.phillipcapital.com.au
SRI LANKA Asha Phillip Securities Limited
Level 4, Millennium House, 46/58 Navam Mawatha, Colombo 2, Sri Lanka
Tel: (94) 11 2429 100 Fax: (94) 11 2429 199 www.ashaphillip.net/home.htm
INDIA PhillipCapital (India) Private Limited
No. 1, 18th Floor, Urmi Estate, 95 Ganpatrao Kadam Marg, Lower Parel West, Mumbai 400013 Tel: (9122) 2300 2999 Fax: (9122) 6667 9955 www.phillipcapital.in
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HCL TECHNOLOGIES COMPANY UPDATE
Disclosures and Disclaimers PhillipCapital (India) Pvt. Ltd. has three independent equity research groups: Institutional Equities, Institutional Equity Derivatives, and Private Client Group. This report has been prepared by Institutional Equities Group. The views and opinions expressed in this document may, may not match, or may be contrary at times with the views, estimates, rating, and target price of the other equity research groups of PhillipCapital (India) Pvt. Ltd.
This report is issued by PhillipCapital (India) Pvt. Ltd., which is regulated by the SEBI. PhillipCapital (India) Pvt. Ltd. is a subsidiary of Phillip (Mauritius) Pvt. Ltd. References to "PCIPL" in this report shall mean PhillipCapital (India) Pvt. Ltd unless otherwise stated. This report is prepared and distributed by PCIPL for information purposes only, and neither the information contained herein, nor any opinion expressed should be construed or deemed to be construed as solicitation or as offering advice for the purposes of the purchase or sale of any security, investment, or derivatives. The information and opinions contained in the report were considered by PCIPL to be valid when published. The report also contains information provided to PCIPL by third parties. The source of such information will usually be disclosed in the report. Whilst PCIPL has taken all reasonable steps to ensure that this information is correct, PCIPL does not offer any warranty as to the accuracy or completeness of such information. Any person placing reliance on the report to undertake trading does so entirely at his or her own risk and PCIPL does not accept any liability as a result. Securities and Derivatives markets may be subject to rapid and unexpected price movements and past performance is not necessarily an indication of future performance.
This report does not regard the specific investment objectives, financial situation, and the particular needs of any specific person who may receive this report. Investors must undertake independent analysis with their own legal, tax, and financial advisors and reach their own conclusions regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realised. Under no circumstances can it be used or considered as an offer to sell or as a solicitation of any offer to buy or sell the securities mentioned within it. The information contained in the research reports may have been taken from trade and statistical services and other sources, which PCIL believe is reliable. PhillipCapital (India) Pvt. Ltd. or any of its group/associate/affiliate companies do not guarantee that such information is accurate or complete and it should not be relied upon as such. Any opinions expressed reflect judgments at this date and are subject to change without notice.
Important: These disclosures and disclaimers must be read in conjunction with the research report of which it forms part. Receipt and use of the research report is subject to all aspects of these disclosures and disclaimers. Additional information about the issuers and securities discussed in this research report is available on request.
Certifications: The research analyst(s) who prepared this research report hereby certifies that the views expressed in this research report accurately reflect the research analyst’s personal views about all of the subject issuers and/or securities, that the analyst(s) have no known conflict of interest and no part of the research analyst’s compensation was, is, or will be, directly or indirectly, related to the specific views or recommendations contained in this research report.
Additional Disclosures of Interest: Unless specifically mentioned in Point No. 9 below: 1. The Research Analyst(s), PCIL, or its associates or relatives of the Research Analyst does not have any financial interest in the company(ies) covered in
this report. 2. The Research Analyst, PCIL or its associates or relatives of the Research Analyst affiliates collectively do not hold more than 1% of the securities of the
company (ies)covered in this report as of the end of the month immediately preceding the distribution of the research report. 3. The Research Analyst, his/her associate, his/her relative, and PCIL, do not have any other material conflict of interest at the time of publication of this
research report. 4. The Research Analyst, PCIL, and its associates have not received compensation for investment banking or merchant banking or brokerage services or for
any other products or services from the company(ies) covered in this report, in the past twelve months. 5. The Research Analyst, PCIL or its associates have not managed or co‐managed in the previous twelve months, a private or public offering of securities for
the company (ies) covered in this report. 6. PCIL or its associates have not received compensation or other benefits from the company(ies) covered in this report or from any third party, in
connection with the research report. 7. The Research Analyst has not served as an Officer, Director, or employee of the company (ies) covered in the Research report. 8. The Research Analyst and PCIL has not been engaged in market making activity for the company(ies) covered in the Research report. 9. Details of PCIL, Research Analyst and its associates pertaining to the companies covered in the Research report: Sr. no. Particulars Yes/No
1 Whether compensation has been received from the company(ies) covered in the Research report in the past 12 months for investment banking transaction by PCIL
No
2 Whether Research Analyst, PCIL or its associates or relatives of the Research Analyst affiliates collectively hold more than 1% of thecompany(ies) covered in the Research report
No
3 Whether compensation has been received by PCIL or its associates from the company(ies) covered in the Research report No4 PCIL or its affiliates have managed or co‐managed in the previous twelve months a private or public offering of securities for the
company(ies) covered in the Research report No
5 Research Analyst, his associate, PCIL or its associates have received compensation for investment banking or merchant banking or brokerage services or for any other products or services from the company(ies) covered in the Research report, in the last twelve months
No
Independence: PhillipCapital (India) Pvt. Ltd. has not had an investment banking relationship with, and has not received any compensation for investment banking services from, the subject issuers in the past twelve (12) months, and PhillipCapital (India) Pvt. Ltd does not anticipate receiving or intend to seek compensation for investment banking services from the subject issuers in the next three (3) months. PhillipCapital (India) Pvt. Ltd is not a market maker in the securities mentioned in this research report, although it, or its affiliates/employees, may have positions in, purchase or sell, or be materially interested in any of the securities covered in the report.
Suitability and Risks: This research report is for informational purposes only and is not tailored to the specific investment objectives, financial situation or particular requirements of any individual recipient hereof. Certain securities may give rise to substantial risks and may not be suitable for certain investors. Each investor must make its own determination as to the appropriateness of any securities referred to in this research report based upon the legal, tax and accounting considerations applicable to such investor and its own investment objectives or strategy, its financial situation and its investing experience. The value of any security may be positively or adversely affected by changes in foreign exchange or interest rates, as well as by other financial, economic, or political factors. Past performance is not necessarily indicative of future performance or results.
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HCL TECHNOLOGIES COMPANY UPDATE
Sources, Completeness and Accuracy: The material herein is based upon information obtained from sources that PCIPL and the research analyst believe to be reliable, but neither PCIPL nor the research analyst represents or guarantees that the information contained herein is accurate or complete and it should not be relied upon as such. Opinions expressed herein are current opinions as of the date appearing on this material, and are subject to change without notice. Furthermore, PCIPL is under no obligation to update or keep the information current. Without limiting any of the foregoing, in no event shall PCIL, any of its affiliates/employees or any third party involved in, or related to computing or compiling the information have any liability for any damages of any kind including but not limited to any direct or consequential loss or damage, however arising, from the use of this document.
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For U.S. persons only: This research report is a product of PhillipCapital (India) Pvt Ltd., which is the employer of the research analyst(s) who has prepared the research report. The research analyst(s) preparing the research report is/are resident outside the United States (U.S.) and are not associated persons of any U.S.‐regulated broker‐dealer and therefore the analyst(s) is/are not subject to supervision by a U.S. broker‐dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances, and trading securities held by a research analyst account.
This report is intended for distribution by PhillipCapital (India) Pvt Ltd. only to "Major Institutional Investors" as defined by Rule 15a‐6(b)(4) of the U.S. Securities and Exchange Act, 1934 (the Exchange Act) and interpretations thereof by the U.S. Securities and Exchange Commission (SEC) in reliance on Rule 15a 6(a)(2). If the recipient of this report is not a Major Institutional Investor as specified above, then it should not act upon this report and return the same to the sender. Further, this report may not be copied, duplicated, and/or transmitted onward to any U.S. person, which is not a Major Institutional Investor.
In reliance on the exemption from registration provided by Rule 15a‐6 of the Exchange Act and interpretations thereof by the SEC in order to conduct certain business with Major Institutional Investors, PhillipCapital (India) Pvt Ltd. has entered into an agreement with a U.S. registered broker‐dealer, Marco Polo Securities Inc. ("Marco Polo"). Transactions in securities discussed in this research report should be effected through Marco Polo or another U.S. registered broker dealer PhillipCapital (India) Pvt. Ltd. Registered office: No. 1, 18th Floor, Urmi Estate, 95 GanpatraoKadamMarg, Lower Parel West, Mumbai 400013