HCLT’s Q3FY17 revenue grew 3.0% quarter-on-quarter (q-o-q) CC, slightly ahead of our estimate of +2.1% q-o-q. Notably, growth was broadbased across services, with Engineering leading the pack at 7.1% q-o-q CC and other services growing 2-3%.
With 9MFY17 growth at 12.9% year-on-year CC, HCLT kept its guidance of 12-14% CC growth intact, and should reach the higher end with contributions from two IBM partnerships, Butler America and GEOM integrations in Q4.
EBIT margin was 20.4% (+30bp q-o-q; +90bp v/s our estimate), at the higher end of the guided band of 19.5-20.5%. PAT rose 2.8% quarter-on-quarter to Rs 20.7 billion (v/s est. of Rs 19.7 billion) on account of operating performance beat. HCLT announced its third partnership with IBM for modernisation in areas of application security, B2B data transformation, testing automation and mainframe management.
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Residual contribution from existing partnerships and acquisitions will likely contribute ~4pp to HCLT in FY18, helping deliver double-digit CC revenue growth in next fiscal too. With EBIT margin of 20-20.5% in FY17 (despite 50%+ of contribution from partnerships/acquisitions), we see limited risk to our margin estimate of 19.8% in FY18. Return on significant FY17 investments (acquisitions + three IBM partnerships) heightens the uncertainty, factoring which we value HCLT at 14x FY19E EPS. Our price target of R980 implies 15% upside. Maintain ‘Buy’.