Event Update

05 APR 2016

HCL TECHNOLOGIES

BUY

IT - SERVICES

Target Price: Rs 986

Strengthens its engineering expertise

Acquisition of Geometrics business (ex- Dassault JV) will strengthen its
leadership in Engineering Services (USD 1.2 bn; ~19% of rev), esp. in
key Automotive and Industrials where IoT^ adoption is accelerating
PLM#, Mechanical and Embedded segments. Engineering is witnessing
increase in outsourcing/offshoring and the deal will further strengthen its
end-to-end capabilities. Geometric has been acquired at ~ 1.3x
sales/16x PAT (Q3 annualized), which in our view is reasonable given
management control and high growth potential of engineering services.
Premium clientele --opportunity to cross sell:60+ long term client
relationships across Auto OEMs, Industrials and Heavy engineering in
US and Europe and a client base like Goodyear, Daimler Chyrsler,
ABB, Volvo, Aerolia etc.

CMP
Potential Upside

: Rs 838
: 18%

MARKET DATA
No. of Shares
Free Float
Market Cap
52-week High / Low
Avg. Daily vol. (6mth)
Bloomberg Code
Promoters Holding
FII / DII

: 1,410mn
: 40%
: Rs1,184bn
: Rs1,048 / Rs786
: 2.0 mn shares
: HCLT IB Equity
: 60%
: 28% / 5%

Other Highlights

Acquisition is through a share swap ratio: For every 43 shares held, Geometric shareholders will receive 10 shares of
HCL Tech. Dilution for HCL Tech will be 1.1%

Acquisition adds ~2% to topline and ~1% to PAT (based on Q3FY16 standalone financials ex. Dassault JV). Minimal
margin dilution at consolidated level (less than 20 bps)

Business acquired by HCLT has about 2,600 employees catering to about 60 clients across US and Europe. Geometric
reported revenue of USD135 mn in CY15

Acquired entities business mix: Software (48%), Engineering (40%), Embedded (3%), and IP (9%)

Geometrics management concall: Management believes growth opportunities exist. The changing business dynamics
will demand a solution-based approach which would drive deal wins. Outlook on engineering space is positive and
believes Geometric has the ability to tap demand and will be able to provide a unique solution with the help of HCLT.
Management desire is to sustain margin

Financial summary (Consolidated) INR assumption: FY16/17/18: 65/67.3/67.3

FY15

FY16E

FY17E

FY16E

FY17E

FY18E

Sales (Rs bn)

371

423

482

542

Software Services

3.8

4.1

4.4

73

74

89

99

Infra Management

2.3

2.6

3.1

54

61

68

Consolidated

6.4

7.2

8.1

EPS (Rs)

51

52

63

70

% change YoY

7%

12%

13%

Change YOY (%)

14

20

12

P/E (x)

16

16

13

12

RoE (%)

32

28

29

29

RoCE (%)

38

34

37

36

EV/E (x)

12

12

DPS (Rs)

16

24

29

32

Adj PAT (Rs bn)

Con. EPS* (Rs)

Source: *Consensus broker estimates, Company, Axis Capital

^ Internet of Things; # Product Lifecycle Management

FY18E

Key drivers

Y/E June

Revenue (USD bn)

Price performance
110

Sensex

HCL Technologies

100
90

80
Apr-15

Jul-15

Oct-15

Jan-16

Apr-16

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Event Update

05 APR 2016

HCL TECHNOLOGIES
IT - SERVICES

Exhibit 1: Proforma P&L: Geometric + HCL Tech

Geometric
FY16E
FY17E FY18E
Revenue (USD mn)

141

Growth YoY (%)

155

171

10%

10%

6,365

7,156

8,052

7,311

8,222

12.4%

12.5%

14.9%

12.5%

FY18E

HCLT + Geometric
FY16E
FY17E
FY18E
6,365

Revenues (Rsmn)

9,162

423,248

481,615

541,887

423,248 492,051

553,366

EBITDA (Rsmn)

1,448

1,722

1,894

91,233

111,747

128,750

91,233 113,469

130,644

825

939

1,033

73,648

88,727

99,353

73,648

89,666

100,386

1,410

1,410

1,410

1,426

1,426

52

63

70

63

70

PAT (Rsmn)

10,435 11,479

FY16E

HCLT
FY17E

O/S
EPS
EBITDA %
Net margin %

15.8%

16.5%

16.5%

21.6%

23.2%

23.8%

21.6%

23.1%

23.6%

9.0%

9.0%

9.0%

17.4%

18.4%

18.3%

17.4%

18.2%

18.1%

Source: Company, Axis Capital

Valuation
We expect USD revenue growth of ~12.5% each for FY17 and FY18. Our FY17E/
FY18E EPS stand at Rs 63/ Rs 71 implying a growth of 12% in FY18.We roll
forward our target EPS to FY18 and arrive at TP of Rs986. We assign a 14x
multiple given leadership in IMS, Engineering services and benefits from
Geometrics acquisition. Our TP of Rs 986 (14x FY18E EPS) implies 18% upside
from CMP ofRs 838. Maintain BUY. The stock trades at 16x/13x/12x
FY16E/17E/18E EPS.

02

Event Update

05 APR 2016

HCL TECHNOLOGIES
IT - SERVICES

Financial summary (Consolidated)

Profit &loss (Rsbn)
Y/E June
Net sales
Other operating income
Total operating income

Cash flow (Rsbn)

FY15

FY16E

FY17E

FY18E

371

423

482

542

Y/E June

FY15

FY16E

FY17E

FY18E

Profit before tax

92

93

114

129

Depreciation & Amortisation

(5)

(6)

(9)

(11)

Chg in working capital

(7)

(6)

(18)

Cash flow from operations

70

80

91

93

Capital expenditure

(11)

(16)

(15)

(18)

Cash flow from investing

(25)

(29)

(21)

(25)

371

423

482

542

(238)

(277)

(305)

(340)

133

146

177

202

36

34

37

37

(46)

(55)

(65)

(73)

Equity raised/ (repaid)

EBITDA

87

91

112

129

Debt raised/ (repaid)

EBITDA margin (%)

23

22

23

24

Cost of goods sold

Gross profit

Gross margin (%)

Total operating expenses

(3)

(3)

(1)

(1)

Dividend paid

(27)

(39)

(48)

(53)

(29)

(42)

(48)

(53)

16

22

15

FY15

FY16E

FY17E

FY18E

Depreciation

(5)

(6)

(9)

(11)

Cash flow from financing

EBIT

83

85

103

117

Net chg in cash

Net interest
Other income
Profit before tax
Total taxation

Key ratios

10

12

13

92

93

114

129

Y/E June
OPERATIONAL

(19)

(20)

(25)

(30)

Tax rate (%)

21

21

22

23

FDEPS (Rs)

51

52

63

70

Profit after tax

73

74

89

99

CEPS (Rs)

55

57

69

79

16

24

29

32

32

45

46

45

13

14

14

13

Minorities

DPS (Rs)

Profit/ Loss associate co(s)

Dividend payout ratio (%)

Adjusted net profit

73

74

89

99

GROWTH

Adj. PAT margin (%)

20

17

18

18

Net sales (%)

Net non-recurring items

Reported net profit

73

74

89

99

Balance sheet (Rsbn)

Y/E June
Paid-up capital

EBITDA (%)

22

15

Adj net profit (%)

14

20

12

FDEPS (%)

14

20

12

RoE (%)

32.4

27.8

29.3

28.7

RoCE (%)

37.7

33.9

36.6

36.4

PERFORMANCE

FY15

FY16E

FY17E

FY18E

Reserves & surplus

246

281

322

369

EFFICIENCY

Net worth

248

282

323

370

Asset turnover (x)

3.0

2.9

2.9

2.8

Sales/ total assets (x)

1.1

1.1

1.1

1.1

93

92

92

92

119

120

120

109

2.5

2.3

2.4

2.7

Borrowing
Other non-current liabilities
Total liabilities

13

12

11

10

357

405

458

504

Total fixed assets

38

48

54

61

Other Investment

95

107

121

137

110

118

141

155

Debtors
Cash & bank
Loans & advances

Receivable days
Payable days
FINANCIAL STABILITY
Current ratio (x)

Current liabilities

92

109

122

123

Net current assets

136

145

173

205

83

96

101

106

VALUATION

357

405

458

504

PE (x)

16.3

16.0

13.3

11.9

EV/ EBITDA (x)

Other non-current assets

Total assets

Source: Company, Axis Capital

12.3

11.6

9.3

7.9

EV/ Net sales (x)

2.9

2.5

2.2

1.9

PB (x)

4.8

4.2

3.7

3.2

Dividend yield (%)

2.0

2.8

3.4

3.8

Source: Company, Axis Capital

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05 APR 2016

Event Update

HCL TECHNOLOGIES
IT - SERVICES

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04

05 APR 2016

Event Update

HCL TECHNOLOGIES
IT - SERVICES

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05