HCL Technologies Ltd.

 HCL Technologies Ltd.

Stock Info                                                                    

Ticker Name                              HCLTECH

CMP 20 Mar 2021                       960

Face Value                                    2        

Equity Share O/s (Cr.)                270.72

Market Cap. (Rs. Cr.)                 257188

Equity Capital (Cr.)                     543

Book Value (Cr.)                          189.49  

52 Week High                               1067

52 Week Low                                399.30

Industry PE                                  33.35

 

Industry Overview.

As demand for digital technologies accelerates and cost savings create opportunities to replace traditional technologies, the market for large digital transformation deals and managed services is growing. Technology services companies are investing in software products and platforms that transform them into end-to-end solution providers. They are using mergers and acquisitions to acquire digital capabilities and access into newer geographies.

 The COVID-19 pandemic, the resulting disruption of the world economy and the social upheavals of early 2020 have battered some industries. But the Demand for digital technology has continued to be strong.

 

About of Company

HCL Technologies Ltd (HCL Tech) is third largest IT Company in India and is engaged in computer programming, consultancy, and related activities. It operates through the segments like, Software Services, Information Technology (IT) Services, and Business Process Outsourcing Services. The Software Services segment provides application development and maintenance, enterprise application, next generation software as a service application services, engineering, and research and development. The IT Services segment provides management services involving customer's information technology assets. The Business Process Outsourcing Services segment offers traditional contact center and help desk services.

 Shareholding Pattern    Q3 FY21

Promoters                                     60.33%

FIIs                                                26.92%

DIIs                                                10.25%

Government                                  0.04%

Public                                             4.46%

Peer Comparison

Company	CMP Rs.	Market Cap. Cr.	EPS	Div. Yield %	ROE%	P/E	OPM %	NPM%	D/E
Tcs	3050	11,42,413	86.4x	2.3%	38%	35.2x	28%	21%	0.01x
Infosys	1344	5,72,377	39.1x	1.3%	25%	34.4x	24%	18%	0.01x
Wipro	410	2,25,356	15.8x	0.2%	18%	26.0x	21%	14%	0.01x
Hcl Tech	960	2,57,188	40.7x	1.0%	22%	20.0x	20%	16%	0.10x
Tech Mahindra	989	96,066	46.2x	1.5%	18%	23.1x	14%	11%	0.11x
Mind Tree	1989	34,195	38.4x	0.6%	23%	21.6x	11%	8%	0.00x
L&T Infotech	4075	71,871	87.5x	0.7%	28%	16.3x	19%	14%	0.01x

Company’s Business

Businesses across industries stand at an inflection point today led by far-reaching disruption catalyzed by technologies like Digitalization, Analytics, Cloud, IoT and Automation. To respond to these converging vectors in a structured framework, Company devised our Mode 1-2-3 strategy.

 Mode 1 – IT & Business Service (ITBS) A comprehensive suite of end-to-end digital offerings to address the traditional and transformational needs of large enterprises.

These services offering Include:

• Digital Operation – Integrated IT Operation , Cybersecurity Fusion Centers , Process Operation.

• Digital Business – Consulting , Applications , Insights , IoT (Internet of Things).

• Digital Foundation – Hybrid Cloud , Digital Workplace , Unified Service Management , Cybersecurity & GRC.

Mode 2 – Engineering and R&D Services (ERS) - HCL ERS partners with global enterprises in accelerating product development by leveraging the latest technologies, monetizing product services and providing immersive customer experiences.

These services offering Include:

• Product Engineering – Existing and New Product Lifecycle Services.

• Platform Engineering – Platform Build and Enablement Solution , Cybersecurity.

• Operational Technology -  Plant Engineering, Manufacturing Engineering Services, Assets Modernization and Industry 4.0.

• Embedded Software Engineering

• Hardware & VLSI Engineering , Prototyping , LVM

• Mechanical Engineering

• Verification & Validation

• PLM , Plant Automation & MES

• Software Engineering

Mode 3 – Products & Platforms - The offerings represent HCL’s future vision to create innovative IP by leveraging an ecosystem model through strategic partnerships, carve-outs and co-innovation programs. Through both internal and external IP creation.

These services offering Include: 

• Security Platform

End User Computing

Collaboration Tools

Enterprise Application

Development & Testing

Data Management & Analytics

Hardware Management

Virtualization Management

Service Management

• HCL Software

Digital Solution

Secure DevOps

Platform Components & Tools

Security & Automation

SoFy

 • Actain

Data Management

Data Integration

Data Analytics

• Organic IP

DRYiCE Software

iMRO

Quarterly Performance

	Q3FY21	Q3FY20	YoY%	Q2F21	QoQ%	TTM
Revenue	19302	18135	6.4%	18594	3.8%	55738
Total Expense	13678	15706	-12.9%	13476	1.5%	43935
EBITDA	5813	4786	21.5%	5317	9.3%	16182
Depreciation	1187	942	26.0%	1092	8.7%	3344
EBIT	4626	3844	20.3%	4225	9.5%	12838
Interest	147	158	-7.0%	80	83.8%	352
Profit Before Tax	4479	3686	21.5%	4145	8.1%	12486
Tax	502	742	-32.3%	999	-49.7%	2428
Net Profit	3977	2944	35.1%	3146	26.4%	10058

HCL Tech reported a strong financial performance in Q3 FY21, HCL Revenue crosses US $10 Billion, Delivering 6.4% YoY growth company has reported Rs. 19302 crore in Q3FY21 as compared to Rs 18135 crore in Q3FY20 and company delivering 3.8% QoQ growth to Rs. 19302 crore as compared to Rs. 18594 crore in Q2FY2.

Q3FY21 Earnings Before Interest Depreciation & Tax (EBIDTA) of Rs. 5813 crore increase by 21.5% YoY from Rs. 4786 crore in Q3FY20.

Q3FY21 company reported Net Profit of Rs. 3977 crore, increase by 35.1% YoY from Rs. 2944 crores in Q3FY20.

Company is also planned to hike wages in upcoming Q4FY21. Wages hike impact of about 50bps in Q4.

Strong Performance driven by companies MODE 2 and MODE 3 business led by Digital, Cloud and Products & Platform segments.

• Mode 2 has been the prime driver of growth, up 25.0% YoY and 10.9% QoQ in constant currency, led by good traction witnessed in cloud native and digital programs.

• Mode 3 Products and Platforms business has clocked healthy 9.3% YoY growth in constant currency on back of strong new license sales and robust renewals.

Business Highlights

• Company won 13 transformational deals across industry verticals, including life sciences and healthcare, technology and financial services.

• Company completed the acquisition of Cisco’s Self-Optimizing Network (SON) technology. This acquisition helps to growing in the Telecommunication Industry.

•  Company announced a strategic partnership with Green Datacenter, one of the leading providers of data center services in Switzerland.

• Company filled 10 patents in this quarter.  Patents were filed in the areas of software development, artificial intelligence, machine learning, next-generation technologies, and platforms including IoT, automation, and data analytics, among others.

• HCL Ecosystems Partnership with Google, Microsoft, Cisco, AWS, Dell, IBM and SAP among others.

• HCL Strategic Partnership with Arista, Cohesity, Docker, Mesosphere, Nutanix, Pure Storage, Rubrik, Citrix, VMware, HPI, Intel, HPE and NetApp.

• Company has acquired DWS Ltd. for a Rs. 850.33 crore.

Product Launches

In Q3 company launches various new products, including the following;

• HCL Volt Mix – Application and Development Platform.

• HCL Unica v12.1 Fall Release - Unica’s cloud-native, email/SMS, local, social, and platform integration capabilities.

• HCL Unica Discover V12.1.x – Analytics Platform.

• HCL Digital Experience Fall Release – Faster and Easier digital experience.

• HCL Sametime Premium V11.5 – Video Meetings, Chat Platform with rock-solid data privacy, encryption and auditability.

• HCL Connection v7 – Enables enterprises to harness all the conversations in Microsoft Team.

• HCL Link v1.1 – easy-to-use data integration platform.

• HCL Z Asset Optimizer (ZAO) v2.1 – Monitoring software assets on IBM System Z (mainframe) Platform.

• HCL NetBot – Automation Software.

• Plant WorkBlaze – Aim to making smarter factories, connected and secure.

• Fluid Workplace on SX – Offer digital workplace services. 

Key Metrics

HCL Tech has presence across verticals, geography and service lines

HCL Tech is leading and established IT service provider. Geography wise America contribute 62.5%, Europe contribute 29.5% and ROW (Rest of World) Contribute 8.0% of revenue in Q3FY21.

Segment wise IT and Business services (ITBS) contribute 70.4%, Engineering and R&D Services(ERS) contribute 15.5% and Product and Platform contribute 14.1% of Revenue in Q3FY21.

HCL Tech presence across diversified verticals, Vertical mix, with Financial Services, Manufacturing, Technology & Services, Retail & CPG, Life Science & Healthcare, Telecommunication, Media & Publishing and Public Services.

Q3FY21 Financial service contribute 21.4%, Manufacturing contribute 18.1%, T&S contribute 17.8%, Life Science and Healthcare contribute 13.6% of Revenue these are top four revenue verticals for the company and Retail & CPG contribute 10.5%, Telecommunication, Media & Publishing contribute 8.3% and Public Services contribute 10.3%.

Over past 2 years company has been steadily increasing its share of digital Revenue driven by it’s Mode 2 and Mode 3.

Valuation Analysis

HCL Tech Ltd. reported in FY20 revenue was up by 17% and company  has reported Net Turnover in FY20 of Rs. 70,676 crore as compared to Rs. 60,427 crore in FY19.

FY20 EBITDA (Earning Before Interest Tax and Depreciation) was up by 24.3% to Rs. 17,316 crore as compare to Rs. 13,926 crore in FY19.

PAT(Profit After Tax) was up by 9.3% tp Rs. 11,057 crore FY21 as compared to Rs. 10,120 crore in FY19.

Segment wise revenue contribution by IT & Business Services (IBS) by 71.8% to Rs. 50,742 crore, Engineering and R&D Services (ERS) by 16.7% to Rs. 11,819 crore and Products and Platforms by 11.5% to Rs. 8,115 crore.

Products and Platforms was grown by 62.8% YoY, Engineering and R&D Services was grown by 14.3% YoY and IT & Business Services was grown by 12.5%.

Geography wise breakup of revenue America geography has grown by 13.4%, Europe by 20.2% and Rest of World by 31.1% YoY.

Company has made addition goodwill by Rs. 6,445 crore for acquisition of IBM Software Product in FY20.

Company has been rapidly increasing its share of digital Revenue driven by Mode 2 and Mode 3, IBM products acquisition is reflect in Mode 3 business. Mode 2 (Digital Business) and Mode 3 (Product Business) which are into newer age technologies.

Company has allotted 1,356,832,548 bonus shares of ` 2/- each fully paid-up in FY20.

Analyst View

We believe that HCL Tech would continue to delivers strong revenue momentum. As digital technologies transform business models around the globe, enterprises are increasing their technology spending. Investments in digital, analytics, cloud, internet of things (IoT), cybersecurity and other emerging technologies have been growing exponentially in nearly every large enterprise and that growth is likely to continue.

We expect that company will grow by a 7% during the forecasted period of FY21E. Forecast net turnover estimate in FY21E of Rs. 75,625 crore.

FY21E EBITDA estimate of Rs. 17,089 crore.

FY21E Profit Before Tax(PBT) estimate of Rs. 15,281.

FY21E Net Profit estimate of Rs. 11,722 crore.

Income Statement

Geography wise Estimation America contribute 63.3%, Europe by 28.8% and ROW (Rest of World) by 8.0% of revenue in Q4FY21E.

Segment wise estimation  IT and Business services (ITBS) contribute 70.5%, Engineering and R&D Services(ERS) by 15.9% and Product and Platform by 13.6%.

Industry wise Estimation Financial service contribute 21%, Manufacturing contribute 18.3%, T&S contribute 18.1%, Life Science and Healthcare contribute 13.5% Retail & CPG contribute 10.6%, Telecommunication, Media & Publishing contribute 8.5% and Public Services contribute 10%.

A Buy position recommended for this company with a Target Price of Rs. 1250 per share. At CMP stock trade at 20x of it FY21E/FY23E earnings, at a discount to its large peers.

Ratio Analysis

Key Risk

• Slowdown in organic revenue growth

• Foreign Currency risk (Rupee appreciation or cross currency movement )

• Privacy Risk (Employee and Client owned data leak)

• Restricts Visa have an impact on employee expenses.

Historical Share Price

 Note :

This Report is only for Education Purpose only & Should not be used for investment & any other Reason.

Valuation Date - 20 Mar 2021

Analyst : Mukul Kumar

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