HCLT’s 4QFY18 revenue grew 8.2% year-on-year CC, EBITDA rose 14.6%, and PAT increased 10% to Rs 22.3 billion. The company delivered quarter-on-quarter CC revenue growth of 1.2% versus our estimate of +2%. EBIT margin for the quarter was flat at 19.6%, in line with our estimate of 19.8%. Full-year FY18 revenue grew 10.5% year-on-year CC, EBITDA rose 11% and PAT grew 3.8%. For FY19, HCLT guided for CC revenue growth of 9.5-11.5%. From the mid-point, 5.25pp of contribution would come from inorganic investments, pegging the organic growth guidance at 5.25%, which is disappointing, considering expectations of a revival in IMS and Application Services. Implied CQGR is 2.55-3.3%, but is expected to be lower organically since C3i is yet to get integrated.
HCLT is pivoting to Mode-2 and Mode-3 services, which contributed 23.4% to FY18 revenues, growing at 41% year-on-year. This is in sync with the rest of the industry, where 20-30% of revenues are being contributed by Digital, which is growing at upwards of 30%. HCLT’s guidance would imply acute pressure in the remaining 77%, where the base of large legacy IMS deals will drag overall growth.
We have marginally revised down our revenue estimates for FY19/20 owing to the slight fourth quarter miss and the tepid FY19 guidance, which was partly offset by cross-currency tailwinds. Our price target of Rs 1,050 discounts forward earnings by 14x. We maintain Neutral, and would reconsider the same subject to:  greater confidence in IRRs from IBM deals and/or  turnaround in core areas of Application Services and IMS. Our EBITDA margin estimates remain intact, whereas our EBIT margin guidance has inched up slightly because of lower amortisation expectations.
HCLT’s 4QFY18 CC revenue grew by 1.2% QoQ v/s our estimate of 2%. USD revenue grew 2.5% QoQ with 130bp cross currency tailwind. In reported terms, Software Services grew 1.2% QoQ to USD1,187m. Application Services was sluggish during the quarter, whereas Engineering drove growth both organically and through acquired IPs. In terms of verticals, growth was driven by Financial Services and Telecom MP&E.
Revenue was flat in the verticals of Manufacturing and Life Sciences & Healthcare. Application Services remained weak, whereas growth was better in the other service lines during the quarter. We have pruned our revenue estimates for FY19/FY20 by 0.6/0.1% owing to weaker-than-anticipated guidance on a marginally lower exit.